BRUSSELS, Nov 26 - France and Italy urged an overhaul of Europe's Stability and Growth Pact on Wednesday, only a day after EU finance ministers defied the European Commission and ran roughshod over its budget rules. The pact is practically dead in its current form and needs to be reborn, according to European Union president Italy, which on Tuesday brokered a deal to suspend disciplinary action against France and Germany despite repeated breaches of the deficit limits. French Finance Minister Francis Mer, who had fought alongside Germany for more budget leniency, said the EU should consider revising the pact in 2005 -- the year by which Berlin and Paris are to comply with the pact under the compromise. Neither Italy nor France spelt out how the pact should be revised, but both were clear on the need for change even as the EU executive Commission met in Brussels to discuss a battle plan after its humiliating defeat. "Pact 1 is finished with. We need to change the parameters in a Pact 2 because the first was found to be too constrictive," said Gianluigi Magri, an Italian Treasury undersecretary. The political deal struck by EU finance ministers ignored the disciplinary procedures of the Stability Pact agreed before the 1999 launch of monetary union to underpin the euro.
The Commission, which is responsible for enforcing EU budget rules, put up a stiff opposition and is now looking at all options, including the possibility of a legal challenge. "The council (of ministers) tried to establish and include most of the Commission's recommendations in a text that has, in our view, not an appropriate legal basis and that is what we are contesting -- not the result but the way it was done," said Commission spokesman Gerassimos Thomas. The row over the Pact, which limits budget deficits to three percent of national output, comes against the backdrop of Europe's fragile economic recovery, which Germany and France have argued they did not want to jeopardise with budget cuts. The authoritative OECD on Wednesday forecast strong 2003 growth of 2.9 percent in the U.S. and 2.7 percent in Japan compared with a mere 0.5 percent in the 12-nation euro zone.
DON'T SPECULATE
Germany, which spearheaded the move to ignore the pact's discipline rules, said there were no grounds for any legal challenge but also added there was no need for any speculation about the future of the Stability Pact. "There is no reason for any speculation about the pact," Finance Ministry spokesman Joerg Mueller said. "The decision was reached by a majority of the finance ministers." Otherwise, Berlin did little to heal the wounds. "I can only advise the Commission to come out of its corner and stop sulking as quickly as possible because we need a functioning cooperation between the Commission and the Council and because we want to work with the Commission," German Finance Minister Hans Eichel told the country's parliament on Tuesday The rift between the countries that supported the deal and the four that did not remained wide. Spanish Economy Minister Rodrigo Rato, one of the minority, was adamant: "We think it was a mistake," he told Le Monde. He said he did not expect the European Central Bank to raise interest rates as a direct result of the deal but added that low deficits were beneficial in the medium term.
"If we have lower deficits, we'll be in a better situation to have low interest rates over the medium and long term." Officials from the ECB, which has issued a rare statement to criticise finance ministers' decision, had the same message. "We are not going to punish the euro zone because some member states don't respect the rules of the game," Belgian central bank chief Guy Quaden told the Wall Street Journal Europe. But he added the deal risked setting a bad example to those who had stuck to the rules and his Spanish counterpart, Jaime Caruana, reiterated the common ECB position by saying the move represented a major risk to confidence in public finances. Polish Prime Minister Leszek Miller said the decision highlighted the need to avert the danger of two or three big countries imposing their views in the whole EU. (additional reporting by Stefano Bernabei in Rome, Elisabeth O'Leary in Madrid, David Crossland and Nick Antonovics in Berlin, Paul Carrel in Paris, Marcin Grajewski in Warsaw, Stella Dawson in Frankfurt//