This week's repudiation of the EU's Stability Pact has broad political as well as economic implications, writes Denis Staunton, European Correspondent, in Naples
Thunder roared above the Mostra d'Oltremare conference centre in Naples yesterday as the rain poured down on EU foreign ministers arriving for two days of talks about Europe's new constitutional treaty.
Inside the conference centre the climate was equally inhospitable, with some ministers making grumpy opening statements and diplomats whispered darkly that next month's treaty-making summit in Brussels is doomed to fail.
Yesterday morning's bad temper owed less to the difficulty of agreeing the treaty than to this week's decision not to punish France and Germany for breaking the EU's budget rules for the third year in succession. The decision spelt the death of the Stability and Growth Pact as an effective disciplinary instrument and soured the political mood throughout Europe.
It not only put the EU's finance ministers in direct conflict with the European Commission and the European Central Bank (ECB) but gave the impression that the EU's rules applied differently to some member-states than to others. By the end of the week France and Germany had been clearly cast as the villains, with the Commission enjoying almost universal sympathy as the wronged party.
The implications of the finance ministers' decision are serious, both for the future of the pact itself and for the negotiations on the constitutional treaty, which are due to end in two weeks. In the longer term, it could also undermine the authority of the Franco-German relationship as an engine of European integration.
What happened in Brussels on Tuesday is that the finance ministers rejected the Commission's call to discipline France and Germany under Article 104(9) of the EU Treaty.
This would have required both countries to make a binding commitment to bring their budget deficits below the pact's limit of 3 per cent of GDP by 2005. It would also have put in place a monitoring system, with the Commission issuing regular reports on the two countries' progress. If Paris and Berlin failed to fulfil their commitments, they could be fined.
Instead of following the Commission's recommendation, the ministers called on France and Germany to make the necessary budget cuts but put the disciplinary procedure in abeyance. The Commission believes that the ministers' action may be illegal but is unlikely to take legal action to overturn the decision.
Paris and Berlin, with the support of finance ministers such as Ireland's Mr McCreevy, have sought to characterise the dispute as one about economics, arguing that they have applied the pact in a flexible way to avoid strangling economic growth. In fact, however, the Commission has applied it with extraordinary flexibility, even giving France and Germany an extra year to reduce their deficits.
The Commission and the finance ministers share the same economic analysis; where they differ is over what political action to take against France and Germany. Paris and Berlin used their political muscle to avoid facing an embarrassing process of scrutiny and to assert the supremacy of governments over the Commission.
The Stability and Growth Pact is a crude, badly designed instrument that was adopted at the insistence of Germany's previous government to ensure that spendthrift member-states would not undermine the stability of the euro. Although Germany, France and Portugal are the only countries to have breached the 3 per cent budget deficit limit, the pact is causing problems for other countries, including Ireland.
The Government would like to borrow more to fund major infrastructure projects but, because of the pact's rules, the entire cost of such multi-annual projects would be included in the budget deficit of a single year, pushing the deficit above the 3 per cent limit.
The Commission proposed to make the pact more flexible earlier this year, but finance ministers were unable to agree on how to reform it. In the aftermath of this week's events a number of countries have called for a thorough overhaul of the budget rules to make them more conducive to promoting economic growth.
Even if the pact is reformed, the decision to spare France and Germany from its discipline is likely to have serious consequences for the European project. In the current treaty negotiations it will reinforce suspicions among many smaller states that, when the EU's bigger countries talk about making the Union more efficient, they are really hoping to seize more power for themselves.
Spain and Poland, with discreet support from Britain, are opposing plans to change the voting system within the Council of Ministers in a way that would more accurately reflect population size. Most small countries have rejected a proposal to limit the Commission to 15, with countries not represented appointing non-voting commissioners.
France and Germany, which began the negotiations by demanding that the draft agreed by the Convention on the Future of Europe be adopted without amendment, express impatience with such concerns.
By trampling over the pact, however, they have undermined their claim to act in the European interest and increased doubts about their longer-term intentions.
The Franco-German relationship has been increasingly dynamic since October 2002, when the French President, Mr Jacques Chirac, and the German Chancellor, Mr Gerhard Schröder, agreed a deal on funding the Common Agricultural Policy for the next decade. Paris and Berlin held a common line in opposition to the war in Iraq, they have adopted a common position on the constitutional treaty and they share ideas on defence co-operation.
Most EU politicians regard the Franco-German axis as a fundamentally benign influence, but there are disturbing signs of arrogance in Paris and Berlin. Mr Chirac upset governments in the EU's new member-states when he told them that they "missed a good opportunity to shut up" over Iraq.
Both Paris and Berlin have shown extraordinary insensitivity towards Poland's demand to be treated in accordance with its size when it joins the EU.
Germany has traditionally championed the interests of smaller states in the EU, as much out of self-interest as altruism, but there are signs of a change of policy. When asked recently about Berlin's attitude, Germany's Foreign Minister, Mr Joschka Fischer, agreed that his country had made common cause with smaller states, but added: "And how did we do it? With a lot of money. The money is not there any more."
France and Germany have reasonable concerns about maintaining a balance between the representation of states and citizens in an enlarged EU with 19 small states and only six big countries. This week's events have not advanced their cause, however, but have heightened fears that a more integrated Europe will have one law for the biggest states and another for the rest.
The Dutch Finance Minister, Mr Gerrit Zalm, one of only two ministers to stand up to Paris and Berlin on Tuesday, said after the meeting that Europe's small states should take heed of what had happened.
"I don't think any of us would want to put our fate in the hands of the big countries now," he said.