TAMIL NADU

EUROPEAN ANXIETIES

EUROPE'S AMBITIOUS STABILITY and Growth Pact, conceived as the bedrock of the European Economic and Monetary Union (EMU) and personified in the single Euro currency, is itself facing some uncertainty. The Pact, which regulates budgetary behaviour within the 12-member EMU, faces its biggest challenge in its eight-year history with Germany and France, its original exponents and architects, themselves pleading for a dilution of its stringent norms. The pressure from the Big Two plus Italy is mounting ahead of a special meeting of European Union Finance Ministers scheduled for March 20. Notwithstanding the fractious nature of the debate over the proposed reform of the Pact, the discord is a visitation of old challenges in a new garb. The member states of the European Monetary Union are required, under the Pact, to contain fiscal deficits below three per cent of their gross domestic product. The measure had been envisaged as a safeguard against price fluctuations and inflationary trends and a guarantee of the Euro's stability. Ironically, France and Germany, decisive players in settling the Maastricht Treaty that gave a blueprint for the EMU, have been in breach of the limit since 2003. Greece is a recent defaulter and Italy and Portugal are potential violators, according to the European Central Bank.

There is disquiet in the European Commission over the implications of this state of affairs for the EMU. Although the Commission has initiated negotiations for reform, it has cautioned against a dilution of the Pact's provisions. However, national governments are anxious to regain control over their budgets given the considerable political costs of slashing welfare programmes and workers' benefits. Germany is already in the midst of an economic slump and unemployment has hit post-war highs. The French Government has encountered stiff resistance to ongoing social sector reforms. Faced with general elections in the near future, the two Governments are in no mood to relent on their positions. Discussions in the Euro Group Council on the direction of reform have been deadlocked. One of the proposals is to allow errant states more time than the current one-year limit to correct their deficit. But demands to add new areas under heads of expenditure that are to be exempted have aroused far more controversy. While President Chirac has suggested excluding defence spending, Italy's Premier, Silvio Berlusconi, has proposed omitting allocations for research. Germany insists that a country's record on socio-economic reform should be weighted in the assessment of excessive deficit. To complicate matters, Chancellor Gerhard Schroeder has revived a controversial demand that the cost of German reunification should be excluded from his country's deficit calculations. Austria and the Netherlands, in contrast, have stoutly resisted any dilution of the Pact, insisting that it will undermine confidence in the economic stability of the euro zone.

Progress towards concord will depend on the ability to project European concerns as coterminous with national interest. The demand for diluting deficit norms may have a justification, considering that the Maastricht Treaty, while prescribing fiscal discipline, simultaneously mandated the observance of minimum standards of social welfare. The rising costs of such welfarism reflect not just the changing demographic profile (that is, the increasing proportion of senior citizens in the population) but also the churning in the employment scene. This is an outcome of the current stage of globalisation of the market economy system marked by movement of capital in search of low-cost labour. The Finance Ministers of the European Union should resolve the deadlock over the Pact so that entry of new members into the EMU is not unduly delayed.

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