Stability pact reform deal littered with exceptions 

Fears that acrimonious Stability and Growth Pact reform rows would overshadow the EU Spring Summit have proved unfounded. Eurozone and non-eurozone countries have reached a deal on the reform of the Stability and Growth Pact following emergency meetings prior to the summit.

The 3% deficit/GDP and 60% debt/GDP criteria remain unchanged.

However, the following has changed:

No excessive deficit procedure will be launched against a member state experiencing negative growth or a prolonged period of low growth (previously the exception was for countries in a recession of 2% negative growth).

Member states recording a "temporary" deficit or one close to the 3% reference value will be able to refer to a series of "relevant factors" to avoid an excessive deficit procedure. Factors will include potential growth, the economic cycle, structural reforms (pensions, social security), policies supporting R&D plus medium-term budgetary efforts (consolidating during good economic times, debt levels, public investment).

Rather than referring to an exhaustive list of "relevant factors" to be taken into account in the assessment of a country's slight and temporary overshoot of the 3% deficit ceiling, the deal sets out chapter headings. These will take the form of general principles whose application will be thrashed out between member states and EU institutions.

Leeway will be given where countries spend on efforts to "foster international solidarity and to achieving European policy goals, notably the reunification of Europe if it has a detrimental effect on the growth and fiscal burden of a member state".

The latter will please France, which wanted public money to development and some military expenditure, and Germany, which wanted special treatment for what it regards as its high contribution to the EU budget. Germany also appears to have got its way as regards the last part of the above text in that it is expected to cite the cost of German reunification.

Countries will have two years (previously one) to correct an excessive deficit. This may be extended in cases of "unexpected and adverse economic events with major unfavourable budgetary effects occurring during the procedure". To benefit from these, countries must show proof that they have adopted the correction measures that were recommended to them.

Member states have committed to using unexpected fiscal receipts during periods of strong growth to reduce their deficits and debt.

Medium-term objectives will be tailored to individual member states based on their current debt ratio and potential growth. This will vary from -1% of GDP for low debt/high potential growth countries to balance or surplus for high debt/low growth countries.

Analyst Charles Wyplosz says the bigger countries got what that they wanted and the pact has been further politicised and is unlikely to "bite" at least in the case of the big countries.

Jean-Claude Juncker, who is currently juggling roles as the prime minister of Luxembourg (the holder of the EU's rotating presidency) plus chairperson of eurogroup and EcoFin, was happy with the deal. 

Juncker noted that stability would remain a key element of the pact and that the Commission's powers and right of initiative had both been protected.

He said that there was a substantial improvement in the governance of the pact, especially concerning the allocation of national responsibilities and community responsibilities.

He was pleased that ministers had been able to solve the difficult problem of taking account of structural reforms in the pact, and in particular, pension system reforms.

In a press statement the Governing Council of the European Central Bank expressed serious concern about the proposed changes to the pact. It stressed the importance of making sure that changes in the corrective arm of the pact do not undermine confidence in the fiscal framework of the EU and the sustainability of public finances in eurozone countries.

Germany's Finance Minister Hans Eichel was delighted that the costs of [German] reunification could be taken into account as a special circumstance. He spoke of a "new start" and said that "Europe's credibility" hinged on closer co-operation between ministers, Commission and the ECB. 

Austria's Finance Minister Karl-Heinz Grasser was said to have been told to stop his resistance by Chancellor Wolfgang Schüssel. He described the fact that Germany's reunifications costs could be taken into account as a "bad joke".

Italy was understood to be relieved that it was off the hook as regards its exorbitant debt. Describing the deal as a "victory for my government and an important step forward", Prime Minister Silvio Berlusconi noted that "all the governments think that the flexibility allows them to carry out costly but necessary reforms for the future".

UK Finance Minister Gordon Brown was reported by the FT as saying that the revised rules could make it harder for the UK to join the euro, citing the rule under which member states would have to keep their medium-term borrowing limit below 1% of national income.

EPP-ED Group Chairman Hans-Gert Pöttering calls the deal reached by EU finance ministers as a "regrettable backward step for European currency stability". He hailed Juncker for successfully preventing any change in the key rules of the pact and for limiting the amount of manoeuvre in the interpretation of the pact. He called on EU leaders at the EU summit to confirm and strengthen the role of the Commission in the deficit procedure.

The Alliance of Liberals and Democrats for Europe (ALDE) welcomes the fact that the new provisions have finally become legally binding but says that the reform appears not to overcome the problem of what happens when the rules are breached. It notes that every decision will still depend on how the Council will decide to interpret the new provisions, so "member states will still have the final say".

Paul Skehan, deputy secretary general of the European Association of Chambers of Commerce and Industry (Eurochambres), criticised the deal: "The review of the pact should be based on economic objectives and principles. Instead, political considerations seem to be the decisive factors. A lite-pact will not restore credibility in the pact, Europe and its institutions."

The German BDI industry association warned that the pact would soon become "toothless".