Europe's Little Guys Could Raise a Big Stink

The euro zone's biggest economies are finding it tough to erase their budget deficits. But most of its smaller members--along with Britain, Sweden, and Denmark, the three European Union nations that have opted out of the single currency--have scaled back capital spending, cut social security payouts, and done just about anything to knock their finances into shape. "[We] burst our boiler" to balance the budget, commented Irish Finance Minister Charles McCreevey recently.

Having struggled valiantly, the smaller countries are now stalwart supporters of the Stability & Growth Pact, which calls on EU governments to balance their budgets by 2006 at the latest. One such country is Greece. Athens' average shortfall for the four years from 2001 to 2004 will be 1.2%, compared with Berlin's 3%. No wonder, then, that Greek Finance Minister Nikos Christodoulakis doesn't see why Germany or anyone else should be given special treatment. "[The pact] is a very useful set of rules," says Christodoulakis, who will chair the next meeting of EU Finance Ministers on Jan. 21. "We cannot exchange [it] because of temporary problems." His Austrian counterpart agrees. "We can't have one rule for the big countries and one for the small," said Finance Minister Karl-Heinz Grasser last fall.

That's why Grasser and his peers likely will move to censure Germany for running "an excessive budget deficit" when they gather in Brussels this month. That's what European Commissioner for Economic & Monetary Affairs Pedro Solbes Mira is lobbying for.

True, Europe's fiscal saints have some good reasons to show mercy on its sinners. Germany and fellow penitents France and Italy (which are also in danger of overshooting the budget-deficit ceiling set under the pact) generate more than half of the euro zone's $7 trillion gross domestic product between them. If their economies stall out on a combination of deficit-reducing tax hikes and spending cuts, all of Europe--and the world--will be the worse for it. A growing Germany, after all, is almost as much in the interests of executives and politicians in the Netherlands and Austria as it is for their counterparts in the Federal Republic.

But the inclination of smaller countries to be merciful is outweighed by their conviction that the euro needs underpinning with sound government finances. Some officials quietly talk about a more flexible interpretation of the pact. But star performers will not support any move that could be interpreted as a radical weakening of the agreement. "It's essential to protect it," says Finnish Finance Minister Sauli Niinisto, who oversees the largest budget surplus of any EU country. "Every now and then, we encounter the view that the pact is too tight. But now--[judging by the performance of Germany, Italy, and France]--we can see it has been too loose." Don't expect the Finance Ministers' powwow to settle this issue.

By David Fairlamb in Frankfurt, with Kerry Capell in London

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