EU reaches budget deficit deal

EU finance ministers have clinched a deal to relax much-flouted budget rules that underpin the euro, bowing to Berlin's key demand that its hefty unification costs be excused.

"A small miracle has happened," Finnish Finance Minister Antti Kalliomaki said after nearly 12 hours of emergency talks in which Germany secured special treatment for the billions it pumps into the former communist east each year.
Ministers agreed to revamp the Stability and Growth Pact, undermined by repeated breaches by Germany and France, to allow more flexibility in applying the rules that limit public deficits to 3 percent of gross domestic product.
"We're going to submit this text on which we reached complete agreement to heads of state and government at their summit on Tuesday and Wednesday," said Luxembourg Prime Minister Jean-Claude Juncker, who brokered the deal as chairman.
"I spoke to enough of them during the meeting to know there will be no long debate and no fierce controversy," he added.
In a concession to EU newcomers such as Poland and Hungary, EU Monetary Affairs Commissioner Joaquin Almunia said countries where pension reform raises the public deficit would enjoy a 5-year grace period, a concession that will make it easier for them to join the euro.
At a brief news conference just before midnight, Juncker said the reborn pact would be more credible and workable. His comments appeared designed to calm financial markets and the European Central Bank, which has warned that interest rates might rise if governments rendered the pact toothless.
"This is not a license to run up debt," a clearly relieved German Finance Minister Hans Eichel told reporters.
Only hours earlier, Austrian Finance Minister Karl-Heinz Grasser had said it would be "a bit of a joke" to exempt Germany's unification costs after an event that happened 15 years ago with the fall of the Berlin Wall.
The Stability Pact was adopted in 1997 at Berlin's behest to prevent governments overspending, but Germany ended up breaching the deficit limit for three years running, as did France.
Berlin may miss the target again this year and Chancellor Gerhard Schroeder is determined to avoid EU disciplinary action in the run-up to a 2006 general election.
Greece is way over the limit too and Italian Prime Minister Silvio Berlusconi threatened ahead of Sunday's talks to go into battle against meddling from Brussels after the EU statistics office Eurostat questioned Rome's deficit reporting.
The pact can theoretically lead to huge fines, but attempts by the EU executive to take Berlin and Paris to task for serial breaches were blocked as the heavyweights fought back, saying the rules needed to take better account of economic downturns.
Ministers broke the deadlock of recent months by agreeing on a series of get-out clauses that will be taken into account before deciding whether to start disciplinary action against countries that exceed the deficit limit.
The "relevant factors" that can excuse a big shortfall were couched in such vague terms that almost all found some solace.
France's demand that military spending and development aid be exempted for example appeared to be enshrined in a clause which cited "international solidarity" as a justification for temporary deficit overshoots.
That, at least, was French Finance Minister Thierry Breton's interpretation and he said he was "extremely happy" with it.
While financial markets have paid scant heed to the struggle over the pact, the ECB has repeatedly suggested that it does not want to see the pact watered down too far and some people fear it could hike credit costs.
Germany is estimated to spend some 4 percent of GDP a year, or 80 billion euros, to rebuild the east of the country since 1990. Discounting those amounts would make it far easier to respect the Stability Pact's deficit limits.
"Germany has taken a great responsibility for the unification of Europe and that has one way or the other to be taken into consideration even in this situation," said Swedish Foreign Minister Par Nuder.
He said he had more respect for the German position than for other countries "where they have deliberately favored having economies with deficits for example by lowering taxes greatly" -- an apparent reference to Italy.
Berlusconi is implementing tax cuts arguing that his priority is to spur the economy and that good growth will eventually cut the deficit.
Growth in the euro zone is expected to be short of 2 percent this year, about half of U.S. expansion rates.
Parts of the agreed text of the pact revamp had to be cleaned up and officials said it would take until June for the actual changes in regulations to go into force.