Ministers tussle with explosive economic issues

European Union finance ministers gather today at the Dutch seaside resort of Scheveningen to talk about some of the most explosive issues in European economic policy, writes Denis Staunton, European Correspondent

The ministers will give their first reaction to the commission's proposals to reform the Stability and Growth Pact, they will consider a plan to harmonise the corporate-tax base throughout Europe and they will discuss the size of the EU's budget for the next seven years.

Most ministers are broadly in favour of the Commission's proposal to make the Stability and Growth Pact more flexible, although some fear that it could spell the end of the pact's usefulness as a coercive budgetary instrument.

The Bundesbank warned this week that the Commission's plan would weaken the pact rather than strengthen it - a view the European Central Bank (ECB) is likely to share.

The Commission wants to broaden the definition of "exceptional circumstances" under which countries could breach the budget deficit limit of 3 per cent of gross domestic product (GDP) without being punished.

At present, only a sharp drop in output is considered an adequate excuse for exceeding the budget limit. The Commission wants to allow countries that experience a prolonged slowdown - such as Germany has in recent years - to escape sanctions if their budget deficit is too high.

The proposals would also give offending countries more time to bring their budgets under control, although governments would be encouraged to use periods of high economic growth to build budget surpluses.

The Economic Affairs Commissioner, Mr Joaquin Almunia, argues that his reforms are necessary to take account of the economic and political reality of the euro zone.

Last November's decision to suspend the pact rather than punish France and Germany, highlighted the lack of political will among finance ministers to enforce the budget rules.

The measures required to reduce budget deficits quickly - spending cuts and tax increases - are not conducive to stimulating growth in countries where a sluggish economy has created the budget problem.

The effective abandonment of the pact's coercive measures in favour of peer pressure reduces the EU's budget rules to little more than a gentlemen's agreement - a development that alarms central bankers and prudent officials.

Some commentators have even suggested that the Economic and Monetary Union that underpins the euro could fall apart because of a lack of effective economic policy co-ordination.

The ministers will consider giving the Eurogroup - the meeting of euro-zone finance ministers - a permanent chairman. The most likely candidate is Luxembourg's popular prime minister and finance minister, Mr Jean-Claude Juncker.

Mr Juncker will chair the group throughout 2005 in any case because his country's EU presidency in the first half of the year will be followed by that of Britain, which is not in the euro zone.

One of the most lively debates by the seaside this weekend could be triggered by a call from the French finance minister, Mr Nicolas Sarkozy, for countries with low corporate-tax rates to receive less in EU funding.

The idea was dismissed by the Commission and rejected by Germany, which shares French fears of companies migrating to low-tax countries in central and eastern Europe.

Mr Sarkozy argues that countries that can afford to charge low corporate-tax rates should not expect to be subsidised by taxpayers in other EU member-states. The accession of a number of low-tax countries into the EU earlier this year has reinforced demands for a minimum corporate-tax rate throughout Europe.

When Ireland was the only member-state levying an unusually low corporate tax, other member-states were annoyed (and sometimes outraged), but did not feel threatened.

Politicians in a number of western European countries now fear that Europe is set to descend into a "race to the bottom" over tax.

There is little support for Mr Sarkozy's proposal and all the ministers know that tax harmonisation is out of the question because any such move would require the unanimous approval of all member-states.

The ministers will discuss a Commission proposal to harmonise the corporate-tax base so that companies can operate more easily in a number of different countries.

The most divisive discussion of the weekend could focus on the EU's Financial Perspectives, or budget plan, for 2007-2013. The budget is due to be agreed next year but the finance ministers are still talking about how big it ought to be.

The Commission, along with most of the EU's poorer countries, wants a budget that would represent 1.14 per cent of the EU's GDP. The richer countries that pay most of the EU's bill want the budget capped at 1 per cent of GDP.

The commission argues that such a limit would necessitate huge cuts in assistance programmes to the EU's poorer regions and would render the EU unable to perform the tasks expected of it.

The Government has yet to outline its position on the EU budget but this weekend's meeting will offer the Minister for Finance, Mr McCreevy, an opportunity to shape Ireland's policy before he moves to Brussels.