EU forced to go soft on budget deficit breaches

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Brussels is to take disciplinary|action against six European Union members for breaching the bloc’s maximum allowed budget deficit as they attempt to shore up their faltering economies. But it emerged last night that France, Ireland, Spain, Hungary, Malta and Latvia are likely to escape relatively unscathed, with the European Commission under heavy pressure not to slap the heavy penalties that breaking EU’s budget deficit rules would normally incur.

Joaquín Almunia, the European Commissioner for Economic and Monetary Affairs, yesterday insisted that it was essential to stick to the EU’s Stability and Growth Pact, which dictates that member states’ deficits must not exceed 3 per cent of gross domestic product, but subsequently promised to stretch existing rules as much as possible in light of the current “exceptional circumstances”.

Mr Almunia said: “The pact is not at all about sanctions during a recession, nobody is talking about sanctions – the Commission will use the full flexibility embedded in the revised pact when considering the next steps.”

The Commission is being forced to temper its calls for fiscal rectitude as it led calls for a Europe-wide stimulus package requiring member states to dig deep into their coffers last autumn.

Mr Almunia may also find it hard to follow through on his pledge to maintain the full credibility of the pact in order to avert “a disaster for Europe’s economies”, given that the six affected countries are likely to continue or exceed their budget deficits for 2008 over the coming year – and are likely to be joined by the majority of eurozone economies in doing so.

Ireland was the worst culprit in the “excessive deficit report”, with an estimated 6.3 per cent budget deficit last year that is set to deepen to 9.5 percent this year. France’s deficit, which only just broke through the 3 per cent barrier in 2008, is set to rise to 4.4 per cent this year.

“It would have been more straightforward for Mr Almunia just to|suspend the 3 per cent limit, which clearly has to happen now though who knows for how long,” said Daniel Gros, director of the Brussels-based Centre for European Policy Studies.