EU finally bows to German pressure on budget deficit rules

March 21 | Updated: Mar 22 2005, 05:30am hrs
European Union finance ministers bowed to German pressure to ease restrictions on budget deficits, seeking to boost an economy that has lagged behind the US for 12 of the last 13 years.

Finance chiefs agreed to let countries using the euro surpass the deficit ceiling of 3% of gross domestic product when growth is sluggish or relevant factors such as Germany's costs for rebuilding its ex-communist East force up spending.

What we're suffering from in Europe is a growth problem, German Finance Minister Hans Eichel said after the agreement late on Sunday in Brussels. The rules, known as the stability pact, are now more rational and more growth-friendly, he said.

Germany, which insisted on the deficit pact before the euro's debut in 1999, has breached it for three years. Standard & Poor's warned that easing the constraints is likely to lead to bigger deficits, lower credit ratings and higher borrowing costs for governments. S&P cut the debt ratings for Italy and Greece last year. The European Central Bank said last week swelling deficits could fuel inflation and force it to raise interest rates.

Germany, France and Italy say they need more room to increase spending and cut taxes to revive their economies. Europe's growth stagnated at 0.2% in the fourth quarter, trailing the US rate of 0.9%. The German and Italian economies, which make up half the 12-nation $10 trillion euro region, contracted.

Europe has outpaced the US only once since 1991. That was in 2001, when the euro region expanded 1.6% and the September 11 attacks reduced US growth to 0.8%, according to EU figures.

The euro fell against the dollar after the agreement in Brussels. Markets will judge it as a sensible adaptation of he pact, said Dutch Finance Minister Gerrit Zalm, another defender of tight controls on spending. What we put down is a credible revision of the pact, he added.

Sub-par growth has kept France, as well as Germany, over the deficit bar since 2002. Figures showing Italy at the limit in 2004 may be revised higher, the EU statistics office said last week. Greece posted a 6.1% deficit in 2004, the highest of any country in the currency's six-year life.