EMU: COMMISSION PROPOSES FLEXIBLE APPLICATION OF STABILITY PACT.

The draft Communication is entitled "Straightening the co-ordination of budgetary policies in EMU: combining flexibility with rigour in the Stability and Growth Pact". The Commission is also expected to adopt two other Communications on November 27, one on upgrading the quality of budgetary statistics in the Euro-zone and the other on better practices related to the notification of deficits and debt.

Proposals.

The draft Communication prepared under the responsibility of the Economic and Monetary Affairs Commissioner, Pedro Solbes, presents five proposals reinforce the existing mechanisms for the co-ordination of budget policies in EMU. These introduce "more flexibility in the interpretation of the Pact" while ensuring more rigorous adherence to the objective of sustainable public finances over the long term to deal with the consequences of the ageing of the population (which will require increased public spending):

- establishing budgetary objectives that take account of the economic cycle;

- developing transitional arrangements for the four countries that have not yet reached the objective of a close to balance budget position. Three of the four States concerned (all except France) agree to reduce their underlying deficit by 0.5% a year;

- avoiding pro-cyclical budget policies in good times. The Member States should use automatic stabilisers to deal with a downturn in the economic cycle;

- ensuring that public finances contribute to growth and employment. The Commission proposes giving more account to the level of the debt in its evaluation of stability programmes. Two cases are then possible: for the countries whose debt is below 60%, a "temporary deterioration" of their budget position could be envisaged; for those whose debt is "well below" the 60% of GDP reference value, a "small deviation" from the close to balance requirement could be considered. But in all cases, the countries concerned must guarantee an adequate safety margin to prevent nominal deficits from breaching the 3% of GDP reference value;

- maintaining the core policy objective of sustainable public finances. This is why the countries with a debt of over 60% must present a detailed strategy to reduce their debt level to below the reference value in their stability and convergence programmes.

Improving procedures.

The difficulties seen in implementing the Stability Pact cannot be solved simply by more flexible application of key provisions, the Communication explains...