Euro Zone Ministers Break Stability Pact

After more than 10 hours of tough negotiations, euro zone finance ministers meeting in Brussels on Monday and Tuesday broke free from the constraints of the EU budget rules by deciding to forego formal sanctions against Germany and France for violating the deficit limits of the Stability and Growth Pact for a third year running. Despite hefty criticism from the European Commission, the majority of the 12 members agreed on a compromise solution that calls for no more than a political commitment to cutting deficits in the coming year.

In addition, Berlin and Paris have been given until 2005 to reign in their budget deficits below the euro zone’s limit of three percent GDP. The rate of cuts is less than demanded by EU Monetary Commissioner Pedro Solbes who warned that the ministers were entering uncharted territory and it would now be harder to enforce budget discipline rules in the future.

"The Commission deeply regrets that these proposals are not following the spirit and the rules of the (EU) treaty and the Stability and Growth Pact," the EU executive said Tuesday morning.

The three percent deficit limit is the crux of the Stability and Growth Pact which was established before the creation of the monetary union and is designed to underpin the value of the euro. Proponents of strict EU budgetary discipline say the pact is the key to ensuring a strong and stable common currency and reject any plans to water it down.

Criticism for special treatment

Italian Finance Minister Giulio Tremonti, whose country currently holds the rotating EU presidency, said the compromise was in line with the spirit and letter of EU budget rules. But Spain, the Netherlands, Finland and Austria rejected the special treatment for Europe’s two largest economies, and the Commission has vowed to fight the proposal.

"The Commission, while continuing to apply the treaty, will reserve the right to examine the implication of these conclusions, if they are finally accepted, and decide on possible subsequent actions," Solbes said.

EU diplomats opposing the new deal have said European Central Bank chief Jean-Claude Trichet is on their side. The ECB president is a vocal critic of watering down EU budget guidelines and has urged euro zone finance ministers to vote for enforcing the Stability Pact rules.

On Tuesday the proposal will be put to a formal vote by all the 15 current EU ministers.