Schröder Fans the Flames of Pact Dispute

German Chancellor Gerhard Schröder added more fuel to the flames of the already blazing Stability and Growth Pact row on Wednesday by apparently siding with his French counterpart, Jacques Chirac. Schröder’s comments have expanded the controversy surrounding the French President’s remarks on the possible relaxation of rules that prevent euro zone governments having budget deficits greater than three percent of the size of their economy.

At a news conference in Berlin on Wednesday, the Chancellor stopped short of reiterating Chirac’s call for a "relaxation" of the pact, but his praise certainly added significant political weight behind one of the French president’s main justifications for leniency - economic growth for Europe at the expense of rigid controls on budget deficits.

Franco-German axis

The French President caused outrage on Monday when he called for temporary measures that would relax the pact. Chirac’s Bastille Day speech was seen by many euro zone finance ministers as a “storming” of the Stability Pact and a threat to the Euro. Now, Schröder – Chirac’s partner in the powerful Franco-German axis that dominates EU economics – has deepened the divisions by calling Chirac's comments "great and really very important."

In reference to the French President’s comments on aiding growth through temporary measures, Schröder said, "he made clear that the pact is called the Stability and Growth Pact for a good reason. Everyone only ever talks about the stability pact."

Don't forget the growth

"But it's called the Stability and Growth Pact. And on that basis, it is possible and necessary - and I agree with Chirac on this - to stimulate growth," Schröder said. Both Schröder and Chirac are trying to revive their stagnant economies by cutting taxes at home. However, in the case of Germany, the estimated €15.6bn in shortfalls due to the tax reform are expected to lead to a further €5bn in public spending, bringing total new borrowing in 2004 to just under €29bn.

The split within the EU over the pact now looks more serious with the leader of Europe’s largest economy aligning himself with the man who has called for greater flexibility in interpreting the rules that underpin the euro. Until Schröder spoke out on Wednesday, the French President, who had been widely criticized for his comments, had stood alone.

Permanent shift or flattery?

With Schröder on side, the combined political clout of France and Germany, who together make up almost half of the EU’s economy, could tip the debate inside Europe toward Chirac's idea of a temporary easing of the rules. However, it’s yet to be ascertained whether Schröder's comments represent a permanent shift in Germany's position or if he is trying to flatter his close ally while others rally against him.

France appears unmoved by the opposition voiced across the EU to its call for an easing of the rules. Finance Minister Francis Mer admitted on Tuesday that France expected to break the rules for a third consecutive year in 2004. France recorded a deficit of 3.1 percent of its gross domestic product (GDP) in 2002 and the government has forecast the shortfall may be as high as 3.6 percent this year. Germany is also expected to record a third year in the EU red -- a scenario that could see both countries facing hefty fines.