The Wall Street Journal

October 25, 2002


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 ECB, Governments Face Off Over Divergent Fiscal Policies
 ECB Leaves Rates Unchanged for 11th Straight Month3
 ECB Holds Steady on Rates as the Clamor for Cuts Grows4
 ECB Fears That Slide in Stock Prices Hampers Region's Growth5

ECB Defends Its Fiscal Rules
As Nations Call for Leniency


BERLIN -- The European Central Bank counterattacked Thursday by blasting the growing ranks of critics of the fiscal rules that underpin the euro.

The deficit problems of some countries are due not to the inflexibility of the Stability and Growth Pact, the agreement that steers governments toward balancing their budgets, but to their "unwillingness to honor their commitment to the rules," the ECB said in a statement.

The central bank said the problem countries -- Germany, France, Italy and Portugal -- didn't cut their deficits deeply enough when the economy was strong a few years ago. If they had, the 3% deficit limit would have been more than generous enough to allow for the normal effects of the downturn on their budgets, namely, lower tax revenues and higher unemployment payments, the ECB said.

The unusual statement comes after the Stability and Growth Pact suffered a series of blows in recent days, which raised speculation that it would be changed to allow for more fiscal flexibility. Earlier this month, France flatly rejected requests by the European Commission to make more budget cuts this year, saying that the nation had other priorities at the moment. Germany, traditionally Europe's staunch defender of fiscal austerity, acknowledged last week that its deficit probably will breach the 3% limit, which risks incurring massive fines. Then Romano Prodi, the president of the European Commission, the body that oversees budget commitments from member governments, went so far as to call the stability pact "stupid."

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The ECB now finds itself as one of the few defenders of the fiscal rules, which were written by the countries that are now violating or ignoring them. Wim Duisenberg, the president of the ECB, explained Thursday at a conference in Frankfurt that, "the discussion has lasted long enough now and it is time the ECB made its own opinions heard." He added that the central bank issued the statement because it is "worried over the debate everywhere in Europe" about the Stability and Growth Pact.

Austria's finance minister, Karl-Heinz Grasser, backed Mr. Duisenberg's position. "I think it's dangerous for Europe that the first time there is a test of one of the cornerstones of our economic and financial policy that we say we can't do it," he told reporters. But the weight of opinion is swinging toward a looser interpretation of the rules.

Governments, and a growing number of economists, fear that complying with the budget rules now risks bringing Europe even closer to recession. With the ECB apparently reluctant to cut interest rates, the governments have no other means of stimulating their economies.

The European Commission and the ECB have shown a willingness to compromise. The commission recently proposed extending the deadline by two years to 2006 for countries to bring their budgets close to balance. It also proposed changing the way deficits are measured, to allow for effects of changes in economic conditions.

Write to Christopher Rhoads at christopher.rhoads@wsj.com1

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Updated October 25, 2002

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