Attitudes to fiscal discipline at bottom of Euro dispute

IT might seem a technical row, but the truth is that the issue which divides EU Finance Ministers over one clause in the post EMU Stability Pact goes to the very root of economics and national psyches.

Last night ministers were close to agreement on the rules which will bind euro participating countries to budget disciplines in the aftermath of the single currency. If agreement is reached the issue will go to heads of government today.

The Stability Pact was the brainchild of the German Finance Minister, Mr Theo Waigel. Ever since he floated the idea two years ado he has maintained a proprietorial interest in the concept.

The problem, as Bonn saw it, was that there was a danger that as soon as countries had qualified for the euro they would relax the fiscal disciplines that qualification required. If they did so the viability of the single currency would be immediately called into question on the financial markets.

Such a prospect was anathema to Germany with its historic memories of hyperinflation, and so a failure to copper fasten continued disciplines would almost certainly result in a massive public movement in Germany against sacrificing the mark for this dubious new entity. The Stability Pact would be Germany's price for the loss of the mark.

Finance ministers have long been agreed that the key discipline, from which all others flowed, consists in keeping the government deficit below 3 per cent.

The Stability Pact was thus conceived as a means of binding countries not to running excessive deficits and providing for sanctions, primarily as a deterrent, to prevent the wayward from being tempted.

While Mr Waigel sought agreement on a permanent commitment to balanced budgets, ministers would only go so far as citing this as an aspiration in the pact. Sanctions, in the form of cash deposits and then fines ranging from 0.2 per cent to 0.5 per cent of GDP, would only come into force at 3 per cent.

The challenge then became to find a formula to define the "temporary and exceptional circumstances" in which such fines would not apply. Germany insisted that the process be as automatic as possible. France and others insisted, with the treaty on their side, that any final decision on a fine had to be subject to political control.

And there we stood last night.

Mr Waigel has proposed that "exceptional circumstances" be defined simply and precisely as a 2 per cent decline in production over a sustained period. Yesterday he said he would accept a figure of 1.5 per cent. The Commission, and others, have suggested a formula that dispenses with a figured and leaves to the discretion of ministers an assessment of what constitutes a significant recession.

A third formula, suggested by the Monetary Committee of the Union last week, provides for automatic dispensation from fines when a recession exceeds 1.5 per cent, and discretion between 0.5 per cent and 1.5 per cent.

Negotiators were last night working on a compromise which would incorporate all three proposals. But the real question was whether Germany wanted to do a deal now or believed it should be seen to put up a longer fight in defence of its honour.