European Union finance ministers have been warned that an economic downturn is contributing to ballooning budget deficits in Europe's largest economies, threatening the stability of the European currency. This year's economic growth estimate for the Eurozone has been revised sharply downward.
This two-day gathering of EU finance ministers opened with a big black cloud hanging over troubling economic indicators. First was word that the Eurozone's big three economies - Germany, France and Italy - are all struggling to meet the 3 percent deficit ceiling they agreed to before the launch of the common currency, the euro. A fourth member, Portugal, is already well over the deficit ceiling.
Greek Finance Minister Nikolaos Christodoulakis, chairman of the Eurozone foreign ministers group, said procedures to impose sanctions on the Portuguese government are already under way.
"For the first time after the launch of the euro we had to face the excessive deficit procedure in the case of Portugal," he explained. "We have asked the Commission to prepare a note and the [EU governing] council is going to take decisions later this year."
Mr. Christodoulakis also announced that economic growth in the Eurozone, as the 12 EU countries that adopted the common currency are known, is slowing down. Estimates earlier this year were for growth of about 1.4 percent. But at a news conference Friday, Mr. Christodoulakis and European Economics and Monetary Affairs Commissioner Pedro Solbes said the forecast has been revised downward. Now, it looks as if growth may not even reach the 1 percent level.
This, coupled with several other negative indicators, had touched off behind the scenes rumblings that the 12 euro countries might be forced to do what just a few years ago would have been unthinkable, raise the 3 percent deficit ceiling that had been set earlier to ensure fiscal discipline.
Italy in particular, with its deficits rising, had been calling for easing the ceiling set in the so-called Stability and Growth Pact that was agreed on to give the euro more credibility.
But the issue is extremely sensitive in Germany, which insisted on the Stability Pact in the 1990s to ensure that it would not exchange its solid deutsche mark for a weak euro. But with Germany's deficit now dangerously close to the 3 percent ceiling, and with German elections later this month, Mr. Christodoulakis, as chairman of the euro finance ministers group, tried to reassure reporters that any change in the Stability Pact at this point is out of the question.
"The euro group meeting concluded that the Stability and Growth Pact must be respected so that whatever the circumstances, the 3 percent ceiling is not exceeded," he said.
Still there is much speculation the rules might be relaxed once Germany's election is out of the way. Economics and Monetary Affairs Commissioner Solbes left the door open Friday, saying the Stability Pact provides some leeway for countries hit by natural catastrophes. Germany is still recovering from one of the worst floods in memory, a disaster that is expected to cost the Berlin government hundreds of millions, if not billions of euros.