July 13, 2002

Portugal and Italy Run Afoul of Euro Pact Without Penalty

By PAUL MELLER

BRUSSELS, July 12 Portugal and Italy, which agreed along with 10 other European nations to abide by firm fiscal rules when the single euro currency was established, have acknowledged that their national budgets are breaking those rules.

But the European Commission, whose job it is to enforce the rules, is responding by putting off having to recognize the breaches and looking for ways to ease the requirements.

Portugal's prime minister said today that when final figures are available, he believes his country's budget deficit for last year will be about 3.9 percent of gross domestic product, well above the 3 percent ceiling laid down in the euro rules, known as the stability and growth pact.

Italy said in its latest four-year economic plan that it was aiming for a deficit of 0.8 percent in 2003, abandoning a commitment under the pact to bring its budget near to balance.

Though few experts doubt that Portugal and Italy are afoul of the rules, Gerassimos Thomas, a spokesman for the commission on economic and monetary matters, said it was too soon to act. "We are waiting for official data," he said.

That will come soon from Portugal, where an audit task force is expected to issue a report confirming the 3.9 percent figure later this month. Italy will give an official estimate for 2003 in September, when it announces next year's budget.

Mr. Thomas denied that the commission was ducking the issue. "If Portugal's official figure for last year is over 3 percent, the commission is obliged to start the excessive deficit procedure," he said.

But in practical terms, that procedure will involve a lot of waiting and seeing. Mr. Thomas said the commission would start by preparing its own report on Portugal's economy and how the country's finances have been managed since the deficit seemed likely to exceed the ceiling. Then, Portugal would probably be given a year to return to compliance before the commission and the European Union's finance ministers considered imposing the fines called for in the pact.

Mr. Thomas said the commission would wait until September before deciding what to do about Italy, because there was still hope it could squeak by with a deficit of 0.5 percent or less, close enough to balance to satisfy the pact's requirements.

The commission proposed earlier this year that warning letters be sent to Portugal and to Germany, the largest economy in the 12-member euro zone, when it was becoming clear that both were running growing deficits. But the finance ministers overruled the commission and criticized it as failing to take the global slowdown into account, especially in the case of Germany.

The commission has since struggled to hold the pact together against criticism that the rules put too tight a straitjacket on national economic policy. On Thursday, the European Union's commissioner for economic and monetary affairs, Pedro Solbes, presented a plan for a more flexible approach to the pact at a meeting of senior finance officials from the 12 euro nations.

Mr. Solbes proposed giving countries that have managed to balance their budgets more room for maneuver when future economic downturns and shocks threaten growth. But none of the three biggest euro nations France, Italy and Germany would qualify now, and the plan would not get Portugal off the hook, a commission official said. Little progress was made on the plan at the meeting on Thursday.

"It was difficult to discuss this when the three most important players around the table each face short-term budgetary difficulties," one diplomat said. "How can you have a serene and rational debate in such circumstances?"


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