- The Washington Times - Tuesday, November 25, 2003

BRUSSELS (AP) — Germany and France pushed through a deal with their euro-zone partners yesterday allowing the European Union’s economic powerhouses to sidestep fiscal rules so they can try to spend their way out of an economic slump.

For the two nations, the European Union’s decision to let them run up a big deficit offers a welcome way out of economic stagnation. For Europe’s Central Bank, it’s a threat to the stability of the continent’s infant common currency.

Nations including Spain and the Netherlands say the move has choked the life out of fiscal restraint policies underpinning the euro. And the European Union’s executive commission called the decision so bad that it is considering court action.

As part of creating the euro, the 12 nations using it accepted constraints on their national budget policies to assure relative stability of the currency. Many said that is under threat now.

“Treaties must be equal for all and the rules the same for all,” said Spanish Prime Minister Jose Maria Aznar in Madrid. “Europe’s stability policy has taken a very tough blow.”

Deficits in both France and Germany are set to top 3 percent for a third year in 2004. This year, their deficits are expected to exceed 4 percent.

The two nations rallied a majority of the euro-zone nations to back their reprieve plan, with only Spain, the Netherlands, Austria and Finland voting against. The four demanded a bigger effort from the zone’s two biggest economies to bring their spending within EU budget rules, which aim to cap deficits at 3 percent of gross domestic product.

After a fractious all-night meeting, Germany and France grudgingly promised to rein in some spending.

Germany agreed to budget cuts of 0.6 percent of GDP next year and 0.5 percent in 2005 to get its deficit below the 3 percent limit. For France, the cuts amount to 0.77 percent of GDP next year and 0.6 percent in 2005. The cuts were contingent on growth reigniting in both countries.

The decision suspended disciplinary action — including the possibility of huge fines — against France and Germany.

Later, the measure was formally approved by the meeting of all 15 EU finance ministers, when Britain, Sweden and Denmark — which don’t use the common currency — joined the talks.

Hans Eichel, Germany’s finance minister, called it the “best possible solution,” arguing that the German economy needs the extra spending now to get out of a dip, but would do its utmost to get within the 3 percent cap again in 2005.

“We cannot carry a huge amount of debt into the future,” he said, adding that the currency pact “is alive” because Germany wanted to fall in line again as soon as possible.

France agreed. “That way, the spirit [of the rule] has been saved,” said Finance Minister Francis Mer.

The European Central Bank, which manages the euro, said such deficit spending carries “serious dangers.”

“The failure to go along with the rules and procedures … risks undermining the credibility of the institutional framework and the confidence in sound public finances of member states across the euro area.”

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