Euro zone finance ministers were struggling last night to agree a reform of the Stability and Growth Pact, as France and Germany insisted that the EU budget rules should be loosened significantly.
As the ministers gathered in Brussels yesterday evening for a meeting that was expected to last well into the night, Luxembourg's EU Presidency tabled a compromise plan that would allow a range of costs to be taken into account in assessing a breach of the rules.
According to Reuters, the proposal would allow structural reforms of pensions and healthcare systems, exchange rate swings and debt reduction to be taken into account before punishing countries that breached the budget deficit limit of 3 per cent of GDP.
Luxembourg's compromise plan would give countries an extra year on top of the current one year to correct an excessive deficit if there are "special circumstances".
The definition of "special circumstances" justifying a deficit in excess of 3 per cent of GDP would be changed from a 2 per cent growth contraction to any negative annual growth.
Public investment, research and development spending and one-off costs such as natural disasters would also be taken into account when judging a country's budget performance.
Countries such as Ireland, with low public debt and high growth, would be allowed to run a medium-term deficit of up to 1 per cent of GDP - as opposed to a balanced budget, as at present - while countries with high debt would be expected to run a primary budget surplus over the medium term.
Germany wants the cost of its national reunification in 1990 to be taken into account in judging the budget deficit and Berlin's finance minister, Hans Eichel, yesterday expressed caution about the prospects of last night's talks.
"I wouldn't be confident that we will get there today, but in the end we will be successful, although we will need more time than was foreseen in the original timetable," he said.
The finance ministers are hoping to agree a reform of the pact before EU leaders meet in Brussels on March 22nd. Most countries acknowledge the need to reform the pact but Austria's finance minister, Karl-Heinz Grasser, yesterday rejected Luxembourg's compromise proposal.
"I think it is progress, but to a large part in the wrong direction," he said.
A reform of the Stability and Growth Pact became almost inevitable in November 2003 when EU finance ministers agreed to suspend the rules to allow France and Germany to breach the budget deficit limit for the third year in succession.
Since then, almost half of the EUs 25 member-states have exceeded the 3 per cent limit and Greece admitted last year that it has been submitting misleading budget data since 1999.
