Germany Leads Pack of Pact Assassins

In a remarkable twist of irony as EU ministers prepare to gather in Brussels this week to talk about reform of the Stability and Growth Pact, the main architect Germany is a leading voice in calls for the tattered fiscal rules to be taken apart.

Shackled by low growth and crippling high unemployment, the euro zone's biggest but worst-performing economy has effectively found itself caught in a trap of its own making.

Originally designed in 1997 by then German finance minister Theo Waigel to prevent spendthrift economies from hitching a free ride on the coat-tails of standard-bearers of financial rigor such as Germany, the pact stipulates that no euro zone country is allowed to let public finances run too deeply into the red.

The pact sets a limit on each country's public deficit of 3.0 percent of gross domestic product (GDP), while overall debt is not allowed to exceed 60 percent of GDP. Countries are expected to head for public surpluses in times of growth. Breaches of the limits are to be punished with stiff financial penalties.

Reality shows a long list of repeat offenders

So much for the theory.

In reality, nearly half the EU's 25 members have since run up so-called excessive deficits, with France and Germany topping the list of offenders.

Indeed, the euro zone heavyweights' deficit ratios have been well above the 3.0-percent limit for the past three years and there is every indication that, with growth expected to remain sluggish at best, they will break the rules again this year.

While smaller euro zone countries have swallowed the pact's bitter medicine and managed to get their finances in order, laggards France and Germany have long campaigned for a softening of the rules.

They want special mitigating factors to be taken into account when evaluating the state of a country's public finances, with Germany particularly vocal in arguing that the astronomic costs of unification and its massive net contribution to the EU budget form part of the equation.

Generous Germany on the ropes

Germany has ploughed hundreds of billions of euros into unification and is the biggest net contributor to the EU budget. But the euro zone's biggest economy also narrowly escaped its third recession in four years at the end of last year and unemployment in Germany currently stands at a post-war high of 5.2 million or 12.6 percent of the population.

And even current Finance Minister Hans Eichel, who originally presented himself as an iron-fisted and merciless cutter of costs and public-spending, now argues that tightening Germany's purse strings will only make matters worse. It seems to be Germany's intransigence that is the main hurdle to EU-wide agreement being reached on a reform of the pact, analysts said.

"The sticking point seems to be Germany's insistence that some allowance should be made for unification costs and the net contribution to the EU budget," said Dresdner Kleinwort Wasserstein economist Anthony Thomas in an interview with AFP. "Although the German government is unlikely to be permitted such clear allowances, the question is whether finance ministers or government chiefs will be able to come up with appropriate wording to satisfy all parties," Thomas said.

There was no sign Friday of the stalemate being broken. In fact, both sides appeared to be digging their heels in.

Pact struggles divide the European Union

Austrian Chancellor Wolfgang Schüssel insisted that the stability pact should be applied to the letter, while five big member states -- namely Germany, France, Italy, Spain and Britain -- had reportedly reached tacit agreement to block what they deemed to be an all too mechanistic or rigid implementation of the rules.

Addressing a press conference in Schüssel's home city of Vienna on Friday, German Chancellor Gerhard Schroeder said Berlin was not pushing for a modification of the pact "but an interpretation that makes economic sense".

"We want an interpretation that takes into account both stability and growth," the German leader added.

Optimism remains despite sharpened knives

Luxembourg Prime Minister Jean-Claude Juncker, whose country currently holds the EU's rotating presidency, downplayed the lack of progress. "If we don't reach an agreement on Sunday it will not be a catastrophe. It will not prevent us finding an accord at the summit."

As things stand, it looks as if a general list will simply be drawn up of factors justifying an excessive deficit. And "the danger is that the list could be so vague that it could be used to justify any overrun," Thomas said.

In the end, the choice facing EU leaders would be to hold on to a stability pact that effectively remains suspended in its current form "or to reform it so that it is virtually toothless", the economist said. "So it won't really matter whether agreement is reached or not, at least for the moment," Thomas concluded.