Stability and Growth Pact
Denis Staunton
"Europeans - Working Together", Ireland's work programme for the EU presidency, offers a comprehensive guide to many of the biggest issues facing Europe during the next six months. The programme includes no mention at all, however, of the EU's most important economic policy instrument, the Stability and Growth Pact.
This may be because last autumn's ambush and assassination of the pact by France and Germany offers an unparalleled example of Europeans not working together and national governments sacrificing Europe's interests for the sake of their own political convenience.
The decision of EU finance ministers not to implement the pact's disciplinary measures against France and Germany for breaking budget rules has put the EU's system of economic governance into crisis. Even if Paris and Berlin keep their promise to reduce their budget deficits to 3 per cent of GDP by 2005, the pact has had its teeth removed and remains no more than a set of unenforceable guidelines.
The continued weakness of the dollar on international financial markets has ensured that the crisis over the pact has had no impact on the euro's exchange rate. The markets' indifference may not endure indefinitely, however, and the removal of the pact's discipline on EU governments could allow future political scares to affect the currency dramatically. The Minister for Finance, Mr McCreevy, acknowledges that most finance ministers believe that the pact is in need of reform but he is pessimistic about the prospects for finding agreement on how to change it. The last time the European Commission proposed changes that would allow countries with low public debt to run higher budget deficits, finance ministers could not agree on who should benefit.
Any move to reform the pact now would almost certainly become a dispute between countries such as the Netherlands - who want tougher rules with stiffer penalties - and others who favour a more lax system. A debate about reform will probably begin during the Irish presidency, but there is unlikely to be any thorough-going overhaul until the end of 2004 at the earliest.
The best hope of salvaging the pact in its present form probably lies in increased economic growth as the resurgent US economy helps Europe to recover. Despite signs that the euro-zone economy has turned the corner, the European Central Bank (ECB) fears that the recovery could be wrecked by the sharp rise in the euro's value against the dollar.
After months of sounding relaxed about the strong euro - it helps to keep inflation low - the ECB now fears that the exchange rate could strangle growth by making European exports uncompetitive. To make matters worse, the markets appear to have stopped listening to the ECB, focusing instead on the US double deficit as a good reason for selling dollars.
If the euro moves above $1.35, the ECB could be forced to intervene in the markets, although such actions are usually successful only if they are co-ordinated with other major central banks. The US administration has shown no anxiety about the falling dollar, which provides a boost to US economic growth.
The state of Europe's economy will be crucial in determining the mood among member-states as they start the process of agreeing the EU's next seven-year budget plan.
The Commission will publish a paper later this month proposing a new budgetary architecture for the EU, focusing on competitiveness and innovation.
The countries that pay most into the EU budget have made it clear they want to cap spending so that an enlarged Union will have to make do on about the same resources as at present. This would mean that new member-states could expect much lower regional development funds, and subsidies to depressed regions elsewhere in Europe would also be cut.
The budget plan, known as the Financial Perspectives, must be agreed unanimously by the 25 member-states, and negotiations will last about two years.
The Irish presidency could help this process by accelerating the resumption of negotiations on the constitutional treaty, ensuring that treaty and budget talks do not become destructively entangled.