Almunia Pledges to Uphold EU Budget-Deficit Rules

By Ben Sills and Rainer Buergin

Dec. 2 (Bloomberg) -- European Union Commissioner for Monetary Affairs Joaquin Almunia pledged to enforce the bloc’s rules that limit the size of budget deficits as finance ministers clashed over how much fiscal stimulus they can afford.

Finance ministers will begin the process of punishing those countries in breach of the EU’s Stability and Growth Pact early next year, Almunia said at a press conference in Brussels late yesterday. The U.K. and Hungary are already under official scrutiny over their deficits, and Almunia has said that Ireland, which forecasts a 2009 deficit more than twice the EU limit, is set to enter the process soon.

“We need to preserve the credibility of our medium-term strategy to have consolidated public finances,” Almunia said.

Budget deficits are spiraling across the EU as governments increase spending in a bid to limit the damage from the worst financial crisis since the Great Depression. European Commission President Jose Barroso said last week officials should exploit the “maximum flexibility” of the EU’s budget rules as he announced a 200 billion-euro ($250 billion) stimulus package.

The pact allows countries to exceed the EU deficit limit of 3 percent of gross domestic product by “a few” tenths of a percentage point for one year, Almunia said yesterday.

The French government, which the International Monetary Fund expects to exceed the limit this year and next, will boost spending by around 19 billion euros, or 1 percent of GDP, to bolster economic activity, Finance Minister Christine Lagarde said last week. Spain’s government, which posted the bloc’s biggest budget surplus last year, is likely to exceed the deficit limit through 2010, Finance Minister Pedro Solbes said last week.

Tax Cuts

The debate over how much fiscal stimulus EU members can afford is fueling tensions between those in favor of jump- starting economic activity with tax cuts and investment and those concerned about preserving budget discipline.

German Chancellor Angela Merkel yesterday said her party will “swim against the tide” of calls to cut taxes in order to support consumer spending in Europe’s largest economy. Dutch Finance Minister Wouter Bos also called for those countries in breach of the limit to be punished.

Merkel’s government, which posted a deficit of 0.2 percent of GDP in 2007, last month agreed on a program of measures costing 32 billion euros over two years, equivalent to 1.3 percent of its gross domestic product.

First Recession

Europe’s economy fell into its first recession in 15 years in the third quarter after the U.S. subprime mortgage crisis led to bankruptcies on Wall Street and pushed up lending costs worldwide, eroding the confidence of investors and consumers. The U.S. economy, the world’s largest, entered a recession a year ago, the panel that dates American business cycles said yesterday, making the contraction already the longest since 1982.

The malaise leaves the European Central Bank facing calls to accelerate the pace of interest-rate cuts this week. Having reduced its benchmark rate by half a percentage point on two occasions since early October, investors are betting the ECB may lower it as much as three-quarters of a point when its governing council convenes this week.

“Monetary policy cannot produce an adequate response to the crisis and so we need to provide a strong fiscal response,” said Luxembourg Finance Minister Jean-Claude Juncker, who led yesterday’s monthly meeting of euro-area finance chiefs in Brussels. “We all think that the discretionary measures which we can and should take should be timely, they should be temporary and coordinated.”

The finance ministers agreed not to reduce the standard rate of value-added tax in the nations that use the euro, Juncker said. “The U.K.’s done it; we don’t rule out that other members would do it, but the eurogroup will not do it,” he said.

The euro-area economy will shrink by 0.5 percent next year as the world’s advanced economies suffer their first simultaneous recession since the Second World War, the IMF forecasts.

To contact the reporters on this story: Ben Sills in Brussels at bsills@bloomberg.net; Rainer Buergin in Brussels at rbuergin1@bloomberg.net.