Euro hopefuls seen backing looser EU stability pact

European Union finance ministers are meeting in Brussels to try to bridge differences over how far to go in easing the rules of the EU Stability and Growth Pact after serial breaches of the budget deficit limits by Germany and France among others.

While the negotiations offer the recent EU entrants a chance to make their voice heard on the running of the world's biggest economic zone, analysts believe the former communist states will generally not wish to rock the boat.

The first reason is obvious. Some of them hope to join the euro within 2 years and are largely in shape in terms of what the stability pact demands in terms of deficit control.

Beyond that, bigger countries with bloated budgets, such as Hungary, Poland and the Czech Republic, hope that moves towards more lenient application of the rules will mean they do not have to include the cost of pension reform in their deficit reports.

That would make the prospect of joining the euro by around 2010 more plausible.

"We trust that the issue of the reform and review of the Stability Pact will progress further (on Sunday)," Hungarian Finance Minister Tibor Draskovics told Reuters, adding that a compromise was in everybody's interest.

"And we trust that this solution will also incorporate the Hungarian proposal which says that those countries which have carried out reforms of their pension systems should be allowed to correct their deficits by these pension payments."

Hungary and Poland are arguing hard that a costly overhaul of pension finances is needed to cater to ageing populations across Europe but that governments will be discouraged from doing it if it means they cannot respect the deficit limit of the pact -- 3 percent of gross domestic product.

Luxembourg, which holds the EU's rotating presidency at the moment, has proposed that pension outlays could be looked on with clemency when a country breaches the 3 percent deficit limit, meaning there would be no disciplinary proceedings.

Some of the EU newcomers, fearing pension costs would keep deficits above the limit for some time and delay membership of the currency club, want the EU to go a step further and exclude pension costs outright from deficit calculations.


DOUBLE STANDARD?

Eastern European states are also concerned about what they see as double standards, with deficits tolerated for years in countries that already have the euro but stringent respect demanded of those in the queue to join the euro.

"An asymmetric system is unfair but it reflects bargaining power," said Willem Buiter, chief economist at regional development bank, the European Bank for Reconstruction and Development (EBRD).

"Even if it is quite likely the 3 percent rule will be interpreted very flexibility for existing EMU members, it will still be used carefully as a screening device for candidates."

The EU newcomers, whose combined GDP accounts for about 10 percent of the euro zone's, have limited economic and political strength .

"It is as if they are saying 'If you can negotiate well enough you can have a 4 percent deficit'," said Witold Orlowski, chief economic aide to Polish President Aleksander Kwasniewski.

"Poland and other candidate states are aware of this double standard but realise that by backing the pact's reform they will not gain easier entry terms."

Source: Reuters