Finance ministers wrong: EU court

EU FINANCE ministers were told by the European Court of Justice they were wrong to suspend their own rules for the Stability and Growth Pact last year.

In doing so, they let the two largest member states, France and Germany, off the hook.

The Ecofin ministers accepted the ruling yesterday and current president, Dutch Finance Minister Gerrit Zalm said they will discuss the next steps in September.

However, France and Germany are not expected to face the massive fines allowed for as punishment under the pact. Both countries are about to breach the budget deficit limit of 3% for the third year in a row but have agreed to take countering measures.

This first ruling on the pact by the EU's highest court offers no solutions but clarifies the European Commission's right to propose action. It also says ministers can refuse the commission's advice on reducing spending.

The ruling insists the procedures must be followed but leaves it open to find a way around them.

The landmark decision is expected to speed up a restructuring of the Pact being undertaken by the Economic and Monetary Affairs Commissioner Joaquin Almunia which will give governments greater scope in deciding how to reduce deficits. The pact devised to keep eurozone states economies in line has been highly divisive; European Commission President Romano Prodi last year labeled it as the "stupidity pact".

Mr Almunia has already said there could be a trade off between low debt and high budget deficits, with low debt countries being given more time to reduce their deficits. This view is supported by Finance Minister Charlie McCreevy who would like to borrow money for capital spending on the basis that Ireland has little or no budget deficits.

A statement from the commission welcoming the ruling said it confirmed the essential role of the Pact regulations in the EU budgetary surveillance process.

France and Germany, who between them account for most of the eurozone GDP, have been supported by other countries also in danger of breaching the limit. Portugal was the first to overshoot the limit and was reprimanded in 2001, but in 2002 German finance minister Hans Eichel refused to take the commission's advice on reducing its burgeoning deficit.

However, six of the 12 eurozone countries are now in breach or about to breach the pact. The others are Italy, Greece, Portugal and the Netherlands.

The Netherlands has been vociferous in insisting the pact be upheld and its minister, Mr Zalm, last year insisted the pact was not dead but simply on ice. Finland, Spain and Austria wanted the pact enforced while Mr McCreevy took the attitude the zones' largest economies could not be forced to do something they did not want to do. PricewaterhouseCoopers in a report on the eurozone advised that it would be counterproductive to take immediate action to correct the budget deficits.

Instead, they recommend the pact should be recast to focus on a medium-term target of reducing cyclically-adjusted budget deficits to no more than 1% of GDP, to "allow for some level of borrowing to cover investment spending while ensuring, in the long term, public debt to GDP ratios fall to sustainable levels in all EU countries".

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