EU proposes changes to Stability Pact

The European Commission yesterday presented a proposed revision of the Stability and Growth Pact, the rules that underpin the euro.

In a press conference following the first Commission meeting after the summer recess, outgoing Commission President Romano Prodi said he believed the proposals "will provide for a stronger and more credible pact".

Under the new proposals, eurozone countries would be allowed to run deficits above the current ceiling of three per cent of GDP in the event of prolonged sluggish growth. The change would accommodate eurozone governments which complain that the rules unfairly prevent them from combating recession through higher spending.

EU finance ministers are scheduled to discuss the proposals next week but a final decision on whether or not to adopt them is not expected until early next year.

Moves to overhaul the Stability Pact took a new momentum after a series of clashes between the Commission and finance ministers over how strictly its rules and disciplinary procedures should be applied. Relations between the two sides hit a low in November 2003 when ministers suspended disciplinary action against Germany and France, which are expected to break the pact's deficit cap of three per cent of GDP for the third year in a row this year.

Economic and Monetary Affairs Commissioner Joaquín Almunia said that with its proposals the Commission was making sure the debate on economic governance was kept as open and transparent as possible.

With regard to budgetary coordination, Mr Almunia said the Commission believes the debate should be limited to four issues, namely, the need to put more focus on debt and sustainability in the surveillance of budgetary positions; to take into account different economic situations when setting the medium-term budgetary objective for each member state in a Union of 25; to ensure earlier actions to correct inadequate budgetary developments during good moments in the economic cycle and to have more reliable statistics.

Although Malta is not directly affected by the proposed changes because it does not yet form part of the single currency, Mr Almunia said new member states were still expected to adhere strictly to their economic convergence plans agreed individually with the EU.

He said this was all the more imperative for the six new member states which have excessive budget deficits. Malta is second on this list.

According to the present rules, new member states are obliged to introduce the euro when their economic situation permits. Malta is aiming at joining as soon as its national financial situation is stabilised.

According to a convergence plan agreed between Malta and the EU, the island has to cut its deficit and come in line with the Stability Pact's criteria by the end of 2006. That effectively means that Malta's first chance to join the euro will not be before 2008. According to the present rules a member state will be eligible to join the eurozone two years after reaching the Stability Pact's criteria.