/www.bloomberg.com/ By Andreas Cremer and Francois de Beaupuy
Berlin, Nov. 4 (Bloomberg) -- Germany and France urged the European Union to downgrade the ``stability pact'' that limits budget deficits, calling for the EU to pay more attention to economic growth and inflation.
The two countries, which account for more than half the $7 trillion economy of the dozen countries using the euro, are in danger of overstepping European deficit limits as growth slips to the weakest pace since the 1993 recession.
``We need to achieve a more complex coordination of economic policies,'' German Finance Minister Hans Eichel told a press conference after meeting his French counterpart Francis Mer. ``For instance inflation -- here Germany is the anchor of stability. The euro-12 group must discuss this.''
Smaller countries from Spain to Finland, which have all but eliminated their deficits, led the opposition to diluting the budget rules, saying higher deficits may prevent the European Central Bank from cutting interest rates to spur growth.
``Countries breaching the limit shouldn't propose softening the pact,'' Dutch Finance Minister Hans Hoogervorst said as he arrived for a meeting of euro finance ministers in Brussels.
The European Commission estimates that the economy will grow less than 1 percent this year. Dwindling economic growth and rising unemployment has eroded tax revenue while pushing up welfare costs, hindering efforts to reduce deficits.
Balanced Budgets
Eight countries -- Belgium, Greece, Spain, Ireland, Luxembourg, the Netherlands, Austria and Finland -- will be in surplus or post deficits below 0.2 percent in 2002, the commission forecasts.
Italy and Portugal are also struggling to meet the deficit rules. Portugal became the first country to overstep the deficit limit of 3 percent of gross domestic product last year and risks surpassing it again in 2002.
The rules are ``rather loose than tight,'' Finnish Finance Minister Sauli Niinistoe said before the Brussels meeting. He called the debate ``misleading because the key issue is all the time focusing on the economy.''
German unemployment, near a three-year high of 4.1 million, will probably show a further increase in a jobless report for October, due to be released on Thursday, a survey of analysts by Bloomberg News showed. Every 100,000 unemployed cost Chancellor Gerhard Schroeder's government about 1.8 billion euros ($1.8 billion) in benefits.
Unemployment
The number of jobseekers in France, which rose to a two-year high of 2.43 million in September, may also increase further in coming months. Confidence among French manufacturers fell to an eight-month low last month, suggesting that businesses will continue to slash costs to restore their margins.
France's Mer said he and Eichel will seek to ``progressively introduce'' broader economic criteria into assessments of national economies. The two countries want to ``refine'' the stability pact without ``questioning'' its principles, he said.
The commission, the EU's executive arm, has recommended extending a deadline for governments to balance their budgets by two years to 2006. Eichel, who said he wants to take advantage of the leeway, expects the German deficit to exceed the EU's limit this year.
France pledged to start cutting its structural deficit by half a point from 2004, one year later than the 11 other countries that use the euro, saying it wants to trim taxes and raise military spending this year and next.