As the European economy continues to languish in the doldrums between growth and recession, proposals are being made at EU level to stimulate its recovery. Most prominent among them is that the Stability and Growth Pact, which lays down the fiscal rules for the eurozone, should be renegotiated to take more account of current economic realities.
It makes good sense to look again at the subject in coming months. Ireland and other member-states would benefit from a suitable reform.
The French and German economies have broken spending limits of three per cent laid down in the pact rules for two years in a row as their governments seek to reduce taxes or increase spending to counter sluggish growth. It now looks as if they will break the limits again next year, triggering sanctions from the European Commission. Other eurozone members have criticised their failure to abide by the rules - and as a result are less willing to accept ideas such as President Chirac's, in which he called for greater flexibility in interpreting them to take account of the economic weight of France and Germany, which make up half the eurozone's activity. Although the German chancellor, Mr Gerhard Schröder, agreed, smaller member-states such as Ireland, Finland, Austria and the Netherlands were quite unwilling to indulge such an arbitrary breaking of the rules when they have adhered so loyally to them.
The Minister for Finance, Mr McCreevy, has previously argued the case for amending the rules to allow more borrowing for capital projects by states which are well within the pact's limits. He had Commission support for this, but other states were afraid less disciplined participants like Italy would take advantage of it. The proposal would certainly ease a number of the Government's problems with taxation and spending in tighter budgetary circumstances. The Economic and Social Research Institute, in its medium-term review, last week supported the case for reform, whether by specifying that only countries with a debt-GDP ratio over 60 per cent should be prohibited from borrowing for infrastructural projects, or by averaging the three per cent rule out over the economic and business cycle.
It makes general sense to adjust the rules in such a way that they can be flexibly applied at different stages of the economic cycle, so long as underlying balances are right. Finance ministers are understandably reluctant to change the rules of the Stability and Growth Pact because they respect its disciplines. It should fall to the heads of state or government to make a political decision that the pact should be changed to facilitate overall economic recovery, perhaps during Ireland's EU presidency next year. The ESRI points out that since Ireland is in broad compliance with the pact, its proposals would be less self-serving than from those having difficulties with it. Nonetheless, the clear benefits for this State to borrow for necessary infrastructural investment cannot be denied.