THE EUROPEAN Commission has told EU states to draw fully on the flexibility contained in the EU's stability and growth pact to cushion the impact of the financial crisis.
But it has also signalled that it will not shy away from recommending punishment for governments that pursue poor economic policies or provide ill-thought-out state subsidies.
"We want to invite member states to draw fully on flexibility provided by the pact. The pact is about peer support in a difficult situation [such] as the one we are living in and not only about peer pressure," said economic affairs commissioner Joaquin Almunia yesterday at the launch of an EU strategy aimed at tackling the financial and economic crises.
But he added that policy errors made by governments should still be punished under the stability pact, which continued to provide the right policy framework for Europe.
The commission's announcement that it would apply the stability pact in a flexible manner was part of a wider package of measures. It also proposed: doubling the amount of financial aid it can provide to member states in times of crisis from €12 billion to €25 billion in aggregate; speeding up payment of EU structural and cohesion funds worth €350 billion between 2007 and 2013 to spur investment; revamping an EU fund to help retrain people who lose their jobs; and asking EU states to recapitalise the European Investment Bank to enable it to offer more loans to businesses.
A paper outlining the measures, From Financial Crisis to Recovery: a European Framework for Action, calls for the creation of a new financial market architecture at EU level, a global response to the financial crisis and a response to help the real economy.
In a section on the stability and growth pact, it notes that EU states' budgetary policies should draw fully on the flexibility permitted in EU treaties. It says "a clear distinction will be made between budgetary consequences stemming from policy errors and cyclical effects including consequences of the financial crisis rescue packages".
"In particular, increases in debt levels due to rescue plans will be taken into account in the surveillance process," says the paper, which EU leaders will discuss next week.
The stability and growth pact was created to ensure the smooth running of the euro currency and the wider European economy. It commits EU states to avoid excessive budgetary deficits by keeping their budget deficit to gross domestic product (GDP) ratio below a 3 per cent limit, and maintaining their debt/GDP ratio below 60 per cent.
Mr Almunia's comments come as he begins evaluating whether he should recommend opening an excessive deficit procedure against Ireland because of its ballooning budget deficit. The Government predicts that, in 2009, it will have a budget deficit of 6.5 per cent of GDP, more than twice the 3 per cent permissible in the pact.
In theory, an excessive deficit procedure launched by the commission and all member states could lead to a fine. However, in practice, this has never happened in the past.
The commission proposal to double the amount of financial aid it can provide to member states from €12 billion to €25 billion follows a decision this week to extend a €6.5 billion loan to Hungary as part of a €20 billion International Monetary Fund and World Bank deal.
The decision by the commission and member states to extend the loan to Hungary leaves only €5.5 billion in EU assistance available to other member states that may need to seek financial aid in coming months.
"We know some other members of the EU are under stress in the financial markets and we are ready to act," said Mr Almunia, who added that Iceland had also requested aid.
Action framework: key points
• Double the amount of EU aid available for EU states to €25 billion - the commission wants to increase the current €12 billion ceiling on loans the EU can provide to member states and candidate states. After supplying Hungary with €6.5 billion, it can legally only raise an extra €5.5 billion for other states under current rules.
• Speed up payment of EU cohesion and structural funds - up to €350 billion is available to member states from the EU budget to spend on infrastructure projects. The commission will try to speed up payments to encourage investment.
• Ask member states to recapitalise the European Investment Bank (EIB) - the EIB is already frontloading €30 billion in loans for small- and medium-sized business. The commission now wants states to provide more cash to the bank.
• Revamp the globalisation adjustment fund - this can only provide retraining aid for workers who lose their jobs when firms move outside Europe. It may now be extended to cover workers who lose their jobs in the current crisis.
• Apply the stability and growth pact in a flexible manner - the commission has told member states they can breach the 3 per cent limit if their budgetary pressures are a consequence of the current crisis, as long as they don't pursue poor policies. Poor policies would include poorly conceived state aid decisions.
These ideas will be considered by EU leaders and finance ministers next week
