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EU Spars Over German Bid for Easing of Deficit Rules (Update3)

March 20 (Bloomberg) -- European finance ministers battled over a German-led call for a relaxation of budget-deficit limits, with smaller countries such as Austria warning that wider deficits would undermine the credibility of the euro.

Finance ministers clashed in Brussels over a proposed revamp of the borrowing rules, blamed by Germany, France and Italy for stifling European growth. The economy has lagged the U.S. in five of the six years since the euro's debut in 1999.

``We have to take the problem of anemic growth seriously,'' German Finance Minister Hans Eichel told reporters as he arrived for today's meeting. ``It's the core European problem and the core German problem.''

European Central Bank President Jean-Claude Trichet said last week that a loosening of the rule capping deficits at 3 percent of gross domestic product might fuel inflation, forcing the ECB to raise interest rates.

Trichet told reporters today he would repeat that warning in the meeting, which began at noon with finance ministers from the 12 euro countries. The remaining 13 EU ministers joined at 5 p.m. A failure to agree on a new rulebook today would leave EU leaders to decide at a summit March 22-23 in Brussels.

Easing the budget constraints is likely to lead to swelling deficits, lower credit ratings and higher borrowing costs for some governments, according to Standard & Poor's. S&P last year cut the sovereign debt ratings of Italy and Greece and revised Portugal's outlook to negative from stable.

German Tax Cut

Europe's growth stagnated at 0.2 percent in the fourth quarter, trailing the U.S. pace of 0.9 percent. The German and Italian economies -- making up half the 12-nation $10 trillion euro region -- contracted.

German Chancellor Gerhard Schroeder, fighting rising unemployment and falling popularity, last week upped the pressure for more lenient enforcement of the stability pact by announcing corporate tax cuts that risk putting Germany's deficit above the 3 percent limit for the fourth year in 2005.

A new proposal by Luxembourg Prime and Finance Minister Jean- Claude Juncker, the chairman of the talks, would allow governments to stay over the limit for as long as five years.

``We cannot accept this paper,'' Austrian Finance Minister Karl-Heinz Grasser said today. Dutch Finance Minister Gerrit Zalm, asked of the odds of an agreement today, said: ``I wouldn't bet.''

`Small Miracle'

Reaching an accord today will take ``a small miracle,'' Finnish Finance Minister Antti Kalliomaeki said.

The euro ministers' debate led Juncker to make minor changes to his proposals to present to the full group of 25 ministers, an EU spokesman told journalists.

France, which like Germany has surpassed the limit since 2002, also needs to come away from the Brussels meetings with a victory to shore up sagging support for the EU's planned constitution in the runup to a May 29 referendum.

Portugal, the Netherlands and Greece also have fallen afoul of the rules. Greece posted a deficit of 6.1 percent in 2004, a record for euro countries, and faces the threat of EU sanctions unless the deficit comes back below 3 percent by 2006.

The original stability pact was devised by German then- Chancellor Helmut Kohl's finance minister, Theo Waigel, over France's objections in 1995 as a way of making the as yet unborn euro currency as solid as the deutsche mark.

France shot down Waigel's call for automatic fines on governments that overstep the 3 percent limit, leaving enforcement up to EU finance ministers. As a result, no country has yet been fined for violating the rules.

`Price Stability'

Debate over a new rulebook began in November 2003 after Germany and France persuaded the rest of the EU to let them off the hook for above-target deficits.

``Let's not weaken the corrective arm of the pact,'' Trichet told a European Parliament committee last week. ``Whatever happens, the ECB according to its own mandate will deliver price stability.''

The central bank has kept its main interest rate at a six- decade low of 2 percent for 22 months.

At the last meeting on March 7-8, the ministers split over a Juncker proposal to set a list of 16 ``relevant factors'' that could be used to spare high-deficit countries from punishment.

A group led by the Netherlands and several Eastern European countries objected to the idea of a list, saying it would render the stability pact toothless. Germany called for a longer list with an explicit reference to the costs of rebuilding eastern Germany following unification in 1990.

``These are enormous burdens that we have to bear and I think that has to be taken into account,'' Eichel said today.

To meet that demand, Juncker proposed that spending on the ``unification of Europe'' could be used to excuse high deficits ``if it has a detrimental effect on the growth and the fiscal burden of a member state.'' The proposal also cites slow growth and high public investment as excuses.

Asked if there will be an agreement today, Juncker said: ``I'm always confident if common sense prevails.''

To contact the reporter on this story:

James G. Neuger at [email protected]

To contact the editor responsible for this story:

Catherine Hickley at [email protected].

Last Updated: March 20, 2005 14:24 EST