---- by VICTORIA MAIN ----
LONDON (AFX) - Chancellor of the exchequer Gordon Brown may have persuaded the European Commission to waive a limit on his public spending plans, but he is expected at Tuesday's meeting of European Union finance ministers in Luxembourg to press for a more flexible stance on the EU stability pact.
Treasury sources said Brown, who looks set to attend the Ecofin gathering despite the imminent UK election, appears to have succeeded in having a recommendation that could have limited his public spending plans dropped from the EU's draft annual economic policy advice, known as Broad Economic Policy Guidelines.
In what many analysts saw as political grandstanding ahead of the June 7 election, Brown told journalists at the last Ecofin meeting that the Commission had no right to require the UK not to exceed a specific ceiling for current public sector expenditure as a proportion of gross domestic product.
Commenting on reports that the Commission has dropped a specific stipulation for the UK to curb current public sector expenditure to 37.3 pct of gross domestic product in 2002-2003, the sources said a concession would be welcome.
However, they said the chancellor's fundamental wish is for a "more sensible interpretation" of the stability pact governing EU member countries' budgets so as not to discourage future public investment. The sources said Brown is not looking for amendments to the pact but for a move away from what he considers the Commission's overly rigid reading of it.
EU monetary sources in Brussels have divulged that, for all its back-pedalling on the spending ceiling, the Commission intends to hold the UK to its declared EMU convergence programme budgetary plans.
The EU's economic policy guidelines will still call on the UK to ensure it carries out its 2001 budget plan to achieve a general government surplus in 2001-2002 of "at least 0.5 pct of GDP" and to ensure it is "close to balance" in 2002-2003, the EU sources said. To be discussed in Luxembourg in preparation for final approval at the EU summit from June 15-16 in Gothenburg, Sweden, the guidelines become the yardstick for member states' economic performance over the next 18 months.
Treasury sources cautiously welcomed signs that the finance ministers may agree to let some countries overshoot their budget targets for this year because euro zone economic growth is slowing faster than forecast. EU governments are usually required to balance their budgets before allowing the so-called automatic stabilisers work to counter the effects of slowing growth.
The sources said that if the ministers did agree to allow countries facing problems of slowing growth to expand their budget deficits temporarily, that would be a welcome development.
Brown, who is in charge of the government's election strategy, looks set to attend the Luxembourg meeting against a domestic backdrop of mounting debate over UK entry to the euro zone.
The government has promised a referendum on the controversial issue should it win re-election as is widely expected. Even though opinion polls show public opposition to the euro of around 60 pct, prime minister Tony Blair has said the referendum is winnable in what was seen as a declaration of intent to take the UK into the single currency.
In a special report last week, Deutsche Bank economists predicted a more pro-EMU stance from the government after June 8 aimed at bringing public opinion round. They judged the chances of a yes vote in a euro referendum to be "higher than is commonly supposed due to the 'soft underbelly' of the 'no' vote" and predicted a 60 pct prospect of entry by January 2005.
Other UK economists considered Brown politically astute to attend the Luxembourg meeting as this shows his willingness both to fight for the UK's cause and to engage with the EU.
While Treasury sources said Brown will not raise his wish for the European Central Bank to be reformed along Bank of England lines at the meeting, economists said the issue could be discussed in the corridors.
"Brown has had a little dig at the ECB, and they've been very defensive but it's a fact that the ECB has to be prepared to evolve a little bit," Credit Suisse First Boston economist Robert Barrie said. "Without wishing to blow our own trumpet, there's a lot of international opinion that the BoE model is a good one, with its explicit inflation target, inflation report, published minutes," he said.
Brown drew a sharp response from Bundesbank president and ECB council member Ernst Welteke recently after claiming he has won support from some EU member countries for his case for bringing the central bank more into line with the BoE.