- The Washington Times - Thursday, November 28, 2002

BRUSSELS (AP) The European Union's head office yesterday proposed relaxing budgetary rules governing the euro, seeking to ease restrictions on governments struggling to meet targets in an economic slowdown.
The proposed reform comes after Germany the EU's largest economy failed to stick to the "stability pact" when it exceeded the EU's rule that the budget deficit may be no more than 3 percent of the nation's gross domestic product.
France is precariously close to exceeding the 3 percent limit and Portugal became the first to violate the ceiling earlier this year.
Under the revised plan, EU governments will be allowed to increase investment spending beyond the pact's targets if they have low debts and deficits, economic and monetary affairs commissioner Pedro Solbes said.
The plan would still force highly indebted euro group members like Italy to make greater efforts to reign in their spending and keeps the goal of reaching balanced budgets by 2004 intact.
"We will continue to act in a decisive and robust manner if deficits breach the 3 percent of GDP … or if member states fail to achieve and sustain budget positions of close to balance or in surplus," Mr. Solbes told a news conference.
He added that under the existing interpretation of the rules, EU governments were "not playing their role in exerting peer pressure on countries that miss budgetary targets," and warned that such an approach "endangers the credibility" of the euro currency.
Flexibility has been a key demand of Britain, which is not in the 12-nation euro zone, but has a low debt level and wants to spend more on public health, transport and schools. Britain is considering on holding a referendum to join the euro.
EU officials said they hoped the changes will be approved by EU governments over the next three months.
While showing flexibility in spending rules, the commission plan also toughens penalties on nations that fail to control public debt by calling for "more rigorous" monitoring and hefty fines if they do not attempt to lower debts.
Critics of the stability pact claim the rules ignore economic cycles by demanding tight controls on spending during economic downturns.
European Commission President Romano Prodi has even called the pact "stupid," and said the rules should be more versatile.
"We must learn from experience and implement the stability and growth pact more intelligently," Mr. Prodi said yesterday.
The commission said last week Germany's deficit would reach 3.8 percent of gross domestic product this year and is recommending possible sanctions under the pact that call for fines for governments that break the 3 percent threshold.
The EU's head office highlighted other worrisome signs in German spending. It said Berlin's gross debt will rise to 60.9 percent of GDP this year, up from 59.5 percent and above the recommended maximum of 60 percent to join the euro currency.
The EU head office also gave a less severe "early warning" to France, because it risks breaking the euro zone's 3 percent deficit rule next year.


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