The Commission has brought the long-running saga of its dispute with France and Germany over infringements of the Stability and Growth Pact to a close. In a decision taken at the Commission's weekly meeting in Strasbourg on 14 December, Economic and Monetary Affairs Commissioner Joaquín Almunia said that "in the light of the Court judgement and given the action taken by France and Germany it would appear that no further steps are required at this point". This means that the excessive deficit procedure has been lifted for now but could in theory be taken up again if necessary.
The Commission's decision is based on projections that the general government deficit in Germany will fall to 2.9% of GDP in 2005 from 3.9% of GDP in 2004 (assuming GDP growth of 1.5%) and in France, to 3.0% of GDP in 2005 from 3.7% of GDP in 2004 (assuming GDP growth of 2.2%).
But even at this stage, the Guardian reports RWI, one of Germany's leading economic institutes, as forecasting the country's budget deficit at 3.4% in 2005 while Deutsche Bank forecasts a figure of 3.3%.
Sounding a note of caution, Almunia added: "The budgetary situation remains vulnerable in the two countries. Should the corrective measures fail the Commission would have to recommend to the Council to enhance budgetary surveillance".
Thomas Mayer, chief European economist at Deutsche Bank, told the Daily Telegraph that "the watering down of the stability pact will develop into a serious liability for the economic and monetary union".
However, Paul de Grauwe, professor of economics at Leuven University, said that the Commission's move was the right one and fitted in with its proposal to move towards a more flexible pact with more emphasis on debt levels and less on deficits. He said the current system where each member state's finances were permanently monitored was overly "heavy" and that low debt countries should be left alone. Describing the current pact as a "skeleton", he believes the debate should move away from the idea of sanctions that will not in reality be applied.