EU experts say ease deficit rules to boost growth

The European Union should radically reform its economic policies and budget rules to give top priority to boosting sluggish growth, a panel of advisers to European Commission President Romano Prodi said yesterday.

Their report came days after France drew fire from other euro zone members for suggesting a temporary softening of the EU's Stability and Growth Pact on budget discipline.

European Monetary Affairs Commissioner Pedro Solbes was quick to say he did not agree with their controversial recommendations while Dutch Finance Minister Gerrit Zalm separately insisted on the need to stick to the current rules.

But the proposals from a team commissioned by the guardian of EU budget rules is bound to give ammunition to those who want to loosen the pact as it suggests ways of amending it that do not need EU treaties to be rewritten.

"We say that we need ever more than before to put growth as the number one priority," said Belgian economics professor Andre Sapir, head of the seven-member panel that submitted its controversial recommendations to the Commission last weekend. Financial market economists agree the Stability Pact should be changed as it makes little sense to adhere to rules that stifle growth. They doubt a change to the Pact would erode its credibility or put the euro under pressure.

"From an economic point of view it doesn't matter whether the deficit is three or four percent," said Rainer Guntermann of Dresdner Kleinwort Wasserstein.

"In any case France and Germany cannot live up to the Pact. So it is more credible to change it in advance rather than to muddle through," Guntermann added.

Germany and France, the bloc's biggest economic powers, plan tax cuts even though they might become repeat offenders, breaching the pact's three per cent deficit limit for a third successive year in 2004 - a move that could trigger fines.

French Finance Minister Francis Mer said in an interview published yesterday that Paris would do its utmost to obey EU rules but that economic weakness was likely to make it hard.

The panel set up by Prodi in mid-2002 said the Stability Pact's get-out clause, which defines exceptional circumstances under which states may break the EU deficit cap, should be made less stringent.