EU ministers seeks accord on stability pact


EU finance ministers will today attempt to hammer out a budget stability pact for states joining European Economic and Monetary Union. The talks in Brussels are the last before the Dublin Summit later this month when EU leaders are due to take key decisions on EMU.

Among the issues to be finalised include the setting of penalties for states which fail to adhere to the accord. The Ministers are expected to try to reach agreement on the exact scale of fines and the economic circumstances under which they would be levied.

Germany, which is insisting on the stability pact to discourage any relaxation of economic efforts after states have joined the euro, wants a rigid system, with automatic fines payable to Brussels when public deficits rise above 3 per cent of national Gross Domestic Product.

Britain, however, has argued that such a system fails to take account of occasional economic blips, leaving the various finance ministries open to hefty payments to Brussels without justification. The British Chancellor of the Exchequer, Mr Kenneth Clarke, has said he wants a system in which fines are payable only in the face of a consistent failure of economic performance which puts the stability of the euro in question.

Securing a budget stability pact has become one of the most difficult hurdles in nailing down a blueprint for EMU. Coming at a time of renewed debate over the Bundesbank's monetary stance and exchange rate policies between Paris and Bonn, the inclusion of a budget pact is seen as an integral part of a credible and sustainable monetary union.

Under the proposed plan, states running annual deficits above 3 per cent of Gross Domestic Product (GDP) could face stiff fines if they failed to curb expenditure. But if a government could show that a severe recession was behind the deterioration of its public finances, it might be able to avoid sanctions. A quantitative expression of such a downturn is where the debate is centered.

Germany wants the recession defined as a 2 per cent annual decline in Gross Domestic Product. Other states have argued for a less rigid approach, preferring a range, such as a fall in output of between 0.5 and 2 per cent, that would force EU finance ministers to decide whether fines were appropriate.

Financial markets have shown little worry over the slow pace of negotiations, with many taking a pragmatic view that an accord will eventually be agreed. "I have the impression that so far markets understand that there are tough negotiations but they have no proof that it could lead to failure," said Mr Eric Chancy, economist at Morgan Stanley in Paris.

Confidence that EMU will be introduced as planned has remained steadfast even amid last week's heated exchange in France over the merits of a strong or weak single currency.

Analysts say that unless the domestic row spills over into a high profile debate between senior policy makers in France and Germany, financial markets are likely to remain sanguine about the EMU timetable.

Any hint to the contrary, however, could prompt a flight out of the financial assets of countries on the periphery of Europe and lead to a strengthening of the deutschmark against most European currencies.