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EU to Sue Finance Ministers Over French, German Deficits - 2004-01-13

The European Commission, the European Union executive body, has decided to take EU finance ministers to court for allowing France and Germany to violate the bloc's budget rules. The commission's challenge to member states could have big consequences for the way the European Union is run. France and Germany broke the rules, and yet they got off lightly. That, at least, is the view of Pedro Solbes, EU Economic and Monetary Affairs Commissioner, who succeeded in persuading most of his fellow commissioners that the case should be taken to the European Court of Justice.

The Commission said its challenge is on whether the finance ministers violated EU procedures in suspending disciplinary action against France and Germany last November by accepting a political commitment from the two to bring their budget deficits back in line.

The EU Stability and Growth Pact specifies that a country's budget deficit cannot exceed three percent of its Gross Domestic Product. France and Germany have run up deficits in excess of the target, and countries like the Netherlands, Austria and Finland - which have observed fiscal discipline - argued that Europe's two giants should have been penalized or forced to make budget cuts. The Commission agrees.

Analyst Charles Jenkins of the Economist Intelligence Unit in London says the Commission's move is risky and will likely cause a rift between member states and the EU institutions in Brussels, just as the bloc is preparing to admit 10 new members.

"They may well feel that the institutions, European institutions, have gone too far - both the commission and the court - and they may then try to reduce their powers in other areas where they are currently accepting their powers, on competition policy and the internal market," said Mr. Jenkins.

Under EU treaties, the Commission is responsible for managing a wide range of pan-European economic issues, from foreign trade to expanding the single market.

Ironically, the budget deficit rules were introduced at the insistence of France and Germany. But the two are struggling with recession and argue that they need to revitalize their economies through public spending and tax cuts, even if it means violating the rigid rules of the Stability and Growth Pact.

Analyst John Higgins of Nomura Securities in London, says France and Germany should have done more in the past to prepare for economic bad times. "They also very clearly failed to save enough money during the good times in the late '90s, when there was plenty of money accumulating in the public finance coffers," said Mr. Higgins. And instead of actually sensibly trying to reduce their deficits at that time, they simply spent the money. And I think that is part of the reason why the Commission has become frustrated with Germany's and France's pleas that they should not be aggressively tightening fiscal policy in this economic downturn."

The Commission feels a precedent has been set. If EU member states can break the rules in this instance, what is to prevent them from doing so again? So it has gone to court to get clarification. A verdict is expected within three to six months.

The Commission's difficulty in upholding EU laws comes at a time of increasing assertiveness by member states. If it loses the court case, it will further damage its already shaky credibility. If it wins, it will only succeed in antagonizing France and Germany and set the stage for an ongoing conflict about where power lies in the European Union.