Monday, December 27, 2004

A small man with a big stick?

Jean-Claude Juncker, prime minister Luxembourg, heading one of the smallest countries in the EU, is planning to take Germany, France and Italy head-on over the Growth and Stability Pacy when his country assumes the EU presidency on 1 January.

He has rejected proposals from the triumvirate to exclude certain types of spending from the eurozone's rules. This, Juncker says, would "open a Pandora's box" and weaken the pact.

Schröder wanted Germany’s net contributions to the EU budget to be taken into account when assessing whether it had broken the pact's three percent deficit limit, the French wanted military spending to be excluded from deficit calculations while the Italian sought to exclude research and development expenditure.

Not mincing words, Juncker has told the Financial Times that he “strongly opposes” removing categories of expenditure from the pact and is working on his own plans for revised rules which he hopes to unveil "by March at the latest".

He is thinking along the lines of keeping the 3 percent deficit ceiling, but giving defaulters "flexibility" in setting timetables to eliminate "excessive" deficits. Countries investing in long-term structural reform of pensions reform or investing for the future would be given more time, as would those with low levels of public debt.

This last proposal will put Juncker up against Berlusconi, who is arguing against the emphasis on debt. His country is massively over the 60 percent pact limit at 106 percent of GDP, a level exceeded only by Greece and comparing rather unfavourably with Luxembourg's four percent.

However, Juncker also appears to be willing to take on Greece, proposing sanctions for countries that disguise deficit and debt problems with false data. "We need to have specific procedures for this kind of behaviour," he says. "If we had had the Greek case two years ago, it would have affected the exchange rate credibility of the currency."

A small man from a small country Juncker may be, but looks like aiming to carry a big stick. However, as we have so often found, when it comes to dealing with the Growth and Stability Pact, words are cheap.

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