The European Central Bank on Tuesday slammed an accord among finance ministers that relaxes the fiscal rules underpinning the euro by giving governments a range of let-outs to escape punishment over bloated deficits. The eurozone's central bank issued a statement just hours after ministers struck a deal in Brussels to rework the rules of the EU Stability and Growth Pact after repeated breaches of the pact's deficit limits by Germany, France and others.
"The Governing Council of the ECB is seriously concerned about the proposed changes to the Stability and Growth Pact," said the ECB, which is independent and sets interest rates for the entire 12-nation euro area.
"It must be avoided that changes in the corrective arm undermine confidence in the fiscal framework of the European Union and the sustainability of public finances in the euro area member states," it said.
Financial markets reacted warily to a deal that ministers hope will end years of squabbling.
The euro weakened marginally and 2-year eurozone government bond yields rose sharply, with some traders saying the pact changes would boost pressure on the ECB to raise interest rates. However, quite apart from the Brussels deal, an expected US interest rate hike this week had created a preference for dollars over euros.
The agreement to let countries run bigger shortfalls without automatic sanctions was a relief to eurozone heavyweights Germany and France, which have breached the EU deficit ceiling three years in a row and want more leeway to boost limp growth.
Germany was a big winner, gaining special treatment for its huge unification costs that should guarantee Chancellor Gerhard Schroeder does not face censure from Brussels before a 2006 general election for his serial excessive deficits.
"(Finance Minister Hans) Eichel secured a good result together with his European colleagues," Schroeder said.
The deal was clinched late on Sunday at emergency talks when ministers of the 25-nation bloc agreed that the Stability and Growth Pact's deficit ceiling of 3 percent of gross domestic product should be interpreted far more flexibly than in the past.
The European Commission put a brave face on an accord that sealed the defeat of its efforts to enforce tighter fiscal discipline, pointing to the ministers' commitment to make "preventive" budget savings in periods of strong growth.
"I think the balance that was found is a good one, a balanced compromise between stability and flexibility," Commission President Joe Manuel Barosso said.
"We didn't want a licence to run up debts. We only wanted a licence to get a sensible period of adjustment ... When you have weaker growth it is more difficult to get back under three percent," Eichel told a midnight news conference.
The deal was a triumph for veteran Luxembourg Prime Minister Jean-Claude Juncker, who chaired the talks and used his contacts with key leaders to reconcile budget hawks and big spenders, defusing a potential crisis on the eve of this week's EU summit which is due to rubber-stamp the compromise accord.
The deal offered something for everyone, promising special consideration for extra spending on development aid, public investment, R&D and innovation, pension reforms and by implication on defence and peacekeeping.
In a concession to EU newcomers such as Poland and Hungary, countries where pension reform raises the public deficit will enjoy a 5-year grace period to absorb the costs, a concession that will make it easier for them to join the euro.
Some economists shared the ECB's concern about the risks of higher deficits but others said the change made sense.
"In general, the development is broadly favourable. Clearly the previous pact was too rigid, so anything that makes it more flexible must be for the good," Howard Archer, an economist at Global Insight, said.
The pact can theoretically lead to huge fines, but attempts by the Commission to take Berlin and Paris to task for serial breaches were blocked as the heavyweights fought back, saying the rules needed to take better account of economic downturns. Growth in the eurozone is expected to be short of 2 percent this year, about half of US expansion rates.
Comments
Comments are closed.