The president of the European Central Bank (ECB) has told the European Parliament that the Stability and Growth Pact is not dead but warned against approving proposals to ease its rules. Mr Jean-Claude Trichet told the Economic and Monetary Affairs Committee that the EU's budget rules remain an important framework for dealing with fiscal issues within the Economic and Monetary Union (EMU).
"Contrary to what some people might have argued, the Stability Pact is not dead, it's not dead and buried," he said.
Mr Trichet said that some improvements to the pact's implementation would be welcome but he restated the ECB's opposition to any weakening of its sanctions.
"Therefore, proposals that would allow for a loosening of the excessive deficit procedure, such as suggestions put forward with regard to the definition of exceptional circumstances and the time frame for the correction of excessive deficits, and proposals to introduce country-specific elements are not contributing to the solidity and soundness of EMU in our view," he said.
France yesterday proposed a budget for 2005 that would reduce its budget deficit by €10 billion, bringing it below the pact's limit of 3 per cent of GDP for the first time since 2001. The finance minister, Mr Nicolas Sarkozy, promised a number of small tax cuts but said that a projected economic growth rate of 2.5 per cent would ensure that the budget deficit would fall to 2.9 per cent of GDP.
Mr Trichet said that the prospects for economic growth in the euro zone remained good, predicting that it would rise from 0.5 per cent in 2003 to between 1.6 per cent and 2.2 per cent this year and between 1.8 per cent and 2.8 per cent in 2005.
"The conditions for a continuation of the economic recovery remain in place. On the external side, global demand remains robust, notwithstanding temporary fluctuations, contributing to euro-area export growth. On the domestic side, higher corporate profitability and favourable financing conditions should support business investment.
In particular, the level of interest rates is very low by historical standards, in both nominal and real terms. Private consumption should also be sustained by growth in real disposable income and, with some time lag, by an improvement in the labour market," he said.
The ECB president remained confident that inflation was under control, particularly on account of moderate wage demands but stressed that the ECB remained vigilant.
"Overall, while the prospects for price developments remain in line with price stability over the medium term, upside risks to price stability have emerged. The governing council will remain vigilant with regard to all developments which could imply risks to price stability over the medium term. The markets and the general public should rest assured that price stability will be maintained over the medium term," he said.
The European Commission reported yesterday that industrial new orders in the euro zone fell by 0.6 per cent in July compared to the previous month.
