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Schröder draws a line in the sand

Posted by Richard Monday, January 17, 2005

With a major meeting of the finance ministers of EU member states scheduled this week in Athens, in yet another attempt to sort out the mess that is the Growth and Stability Pact, German chancellor Gerhard Schröder has given an interview to the Financial Times, expressing his views on how the pact should be "reformed".

Reform of the "excessive deficit procedure", he says, will be the cornerstone. Furthermore, any strategies for reform must reflect the fact that it is not just a stability pact, but also a growth pact.

With that in mind, Schröder argues that fiscal policy cannot be judged simply on the basis of compliance with the 3 percent GDP limit. As an indicator, he says, this is inadequate to deal with the complex realities of fiscal policy. "We must recognise," he says:

…that the goal of consolidating public budgets may well conflict in the short term with the goal of enhancing the potential for economic growth. A reformed pact must take this conflict into account, as well as the need to bring improved growth and employment opportunities into line in the long term with sound public budgets.
The chancellor reminds us that in assessing the performance of member states, the commission must also "take into account all other relevant factors, including the medium-term economic and budgetary position of the member state". This, for Schröder, is the "starting point for reform", a concept developed by Hans Eichel, Germany's finance minister.

The most significant criterion for judgement would be pursuit of a sound policy for growth and employment, for which the country must be given leeway, allowing three separate factors to be considered.

Firstly, reforms, such as Germany's tax and social security measures, can in the short term damp growth or increase deficits. But in the medium term their impact on growth, employment and public budgets is clearly positive. Expenditure on education, innovation, research and development can also have a positive effect. These factors, he says, must be considered when assessing the deficit.

Macroeconomic criteria form a second group. Member states must be given sufficient leeway to provide cyclical incentives. At present a deficit of more than 3 percent is only tolerated during a severe economic downturn.

Finally, specific burdens borne by member states should be taken into consideration. For instance, "countries that finance substantial payments promoting solidarity among peoples within and between EU nations must be given leeway to use fiscal policy to improve their potential for growth and employment." Germany's burdens include the still immense costs of unification and high net transfer payments to the EU.

Thus Schröder wants some very specific exemptions from the pact, which would, effectively, make it a dead letter. Any country, and particularly Germany, could run up a massive deficit, and still come within the terms of the pact if Schröder has his way.

And gone are the days of Helmut Kohl, when "Europe" came first, above German domestic policy. Schröder is very much more assertive, stating – with remarkable bluntness – that: "The pact will work better if intervention by European institutions in the budgetary sovereignty of national parliaments is only permitted under very limited conditions."

This is indeed remarkable. He is planting a huge "hands off" sign on the lawn outside the Berlaymont – a direct challenge to the commission. "Excessive deficit procedures should not be instigated against EU members if they fulfil most of the above criteria", he adds. "Instead, a country should itself submit a programme setting out how to bring its deficit ratio below 3 percent."

Schröder reigns in the commission so tightly that it will only be able to act, "if it is shown that there are serious deficiencies in its programme or if the country, through its own fault, deviates from the consolidation obligations therein should an excessive deficit procedure be initiated."

To ram this home, he adds: "We must not apply the treaty provisions on imposing mandatory requirements and sanctions too mechanically". That's telling 'em. And boy, does he tell them, concluding:

Only if their competence is respected will countries be willing to align their policies more consistently with the economic goals agreed by the EU as part of the Lisbon strategy to improve competitiveness.
That may be a veiled threat, but the veil is so transparent that the vice-squad is taking an interest. "Either you give me what I want, or Lisbon gets it", he is saying. Without Lisbon, the EU is nowhere (although it is probably nowhere with Lisbon, but that's not the point). Schröder has drawn a line in the sand.