BBC On The Record - Broadcast: 06.10.02

Film: Euro Film. There are tough new rules designed to ensure the Euro is not a weak currency. But are they stopping European countries spend more on public services?

PAOLA BUONADONNA: France is gearing up for the fight against crime - violent crime in particular is on the rise and the new government has promised to put ten per cent more officers on the streets. It's what voters would like in Britain too, but it doesn't come cheap. In order to afford improvements to the public services while the economy is in trouble - and without putting up taxes - France will run up a bigger deficit. To be part of the Euro, France and other countries agreed a tough set of rules known as the Stability Pact which determined how much they could borrow. Now these rules are being challenged by governments unwilling to rein in public spending and balance their budget as they promised to do, and France is the worst offender. Many in Britain too worry that if we join the Euro, the Government will have to cut down investment in public services. But many also warn that if the Stability Pact is weakened or even abandoned altogether the credibility of the Euro would be seriously undermined. The Pact requires France and the other members of the Single Currency to keep their borrowing under control, below three per cent of their national income, with a commitment to balance their budgets by 2004. KENNETH CLARKE: The aim was to ensure that you had financial stability inside the new Eurozone and that no one maverick government could run irresponsible public financing policies that would cause problems for everybody. BUONADONNA: But last week, when it became clear that France, Germany, Italy and Portugal were not going be able to meet their obligation by 2004, the European Commission granted them a two year extension, warning them at the same time that the party will then be over and they won't to be let off again. PEDRO SOLBES: If experts analyse in depth what we are proposing they would realise that we continue to stick to the Pact as concerned not breaching the three per cent and reaching the close to balance in the medium term. What we have introduced is a kind of improvement exactly not to postpone again these ideas of the medium term balanced budget. BUONADONNA: The new French Europe minister Noelle Lenoir is the guest of honour at a party at the German Embassy in Paris. The two countries argue that the relaxation of the deadline does not fundamentally undermine the Pact. NOELLE LENOIR: We have welcomed, the Prime Minister has welcomed the proposal of the Commission of two extra years because in the present international context, when you look for instance at the fall...the downfall of the shares, you see that there is a context of global uncertainty and sometimes some flexibility allows to respect and to give more credibility to very rigorous rules. BUONADONNA: But the view from Belgium and some other Eurozone members is very different. They fear this is just the first step in a strategy to weaken the Pact. They have paid a huge political and social price to meet its strict requirements and the impression that bigger, more influential countries are getting away with large deficits without suffering any sanctions is bitterly resented here. DIDIER REYNDERS: To be a member of the Eurozone it was very important to organise some sacrifices in Belgium, an increase for the taxpayers of the tax payments, a cut in some investments in some social expenditure and since 20 years, it was a long process. So after 20 years of difficult times, of sacrifices, it's very strange to see that it was an obligation for the small countries and it is possible to have a deviation for the large countries in Europe. BUONADONNA: But France would rather upset its EU partners than pick a fight with its strong trade unions. Last week a protest against privatisation plans brought more than forty thousand public sector workers onto the streets of Paris. The new government can't afford to ask of its voters the same sacrifices made by Belgium and some believe that even two year delay will leave countries like France in difficulties. ALAN SIMPSON MP: Extending the compliance period for the Stability Pct is just like getting two extra years on death row, you don't want to be sentenced to death for a crime you didn't commit and that's what I think Europe is going to have to turn round and say. We are not guilty of this and we want release, not a delay in execution. BUONADONNA: Of course Britain isn't part of the Single Currency so Gordon Brown's hands aren't tied by the Stability Pact in quite the same way. But as the government agonises over whether to hold a referendum on the Euro, there is growing concern about the impact that membership could have on public expenditure in Britain too. SIMPSON: I think the Chancellor has already been told that it would require twenty billion pound cuts in Britain's borrowing or spending and the impact that that would have on Labour's investment programme for schools, for hospitals, for you know the whole health or transport agenda, this would be disastrous, it's disastrous even before you begin to factor in the effect of the downturn in the global economy. So he would be mad to go down that path and the one thing you have to say about Gordon Brown is that he is not either politically or economically insane. JOHN MONKS: I think it's a totally false argument that is being put forward. The reality is that we are well within the limits of the Stability Pact, in fact Gordon Brown's own rules are very very tough as well on borrowing for investment and we are in a good position and I think it's a real red herring this idea that somehow joining the Euro is an alternative to spending on public investment. It's important that we do both and that's the tactics that this country should pursue. BUONADONNA: Yet a sluggish economy could threaten the British Chancellor's budget plans if a decision to join was taken this side of the next election. KENNETH CLARKE MP: I think the British government are worried by the Stability Pact but in a different way. They're sooner or later going to have to put up taxation if they commit themselves to these spending plans. What they're a bit worried about is that with the slowdown they might have to put up taxation before the next election. BUONADONNA: In order to keep people on board at a difficult time the French Government believes it makes sense to ask for more flexibility in the way the Pact is applied and this view is shared by union leaders in Britain, even those who don't feel that the Single Currency poses an automatic threat to public spending. MONKS: I think the Growth and Stability Pact would benefit from greater flexibility, the kind of flexibility that is encapsulated in the rules that Gordon Brown has laid down for the British economy - the so called golden rule that you can only really borrow for investment purposes but you can borrow when the economy is in a dip to give a boost to, to economic growth which is what is happening with spending at the moment in Britain. BUONADONNA: Since its introduction the Euro has performed rather badly, so it is wise to tinker with the complex mechanism of the Stability Pact? Even some in the pro-Euro ranks fear the return of wild spending by some Single Currency members, the consequences of which would be suffered by all. KENNETH CLARKE: I'm worried about it because it is part of a sustained effort by rather irresponsible Finance Ministers to get out of the Stability Pact because it's politically difficult for them. I hope I'm mistaken. I think the Germans will certainly try to get up to speed and get to the balanced budget over the cycle but the French I'm not so sure - this difficulty will spread if we are not careful. REYNDERS: It's very important because we need more confidence, confidence from the investors, but also for the consumers in all the European Union member states. And I'm sure that it's very important to do that, to have that, that we stick to the Pact, stick to our engagements and this Pact of stability and growth Pact, it's a clear engagement from all the member states and I'm sure that it's important to do that, to go in the right direction with the Pact, but also to keep our goals on medium term. Medium term means in two or three years of course, a balanced budget or a budget close to balance. BUONADONNA: If people here in Britain get the feeling that there are different spending rules for different countries and that budgetary discipline in the Eurozone is a matter of choice rather than a strict requirement this could have implications for the referendum on the Single Currency. It would give ammunition to those who believe that the Euro lacks credibility and is not worth joining. HOWARD FLIGHT MP: The implication of fudging the Stability Pact or even getting rid of it would be that this would be a dangerous unsafe currency because it would mean that individual country members could go merrily borrowing huge amounts if they got governments that wanted to do it, presenting at some stage in the future the threat of inflation and bringing the contagion to everybody else. So it would be a, if you like, an unsafe currency to join and down that alleyway, who wants to join an unsafe currency? BUONADONNA: But just like here in France, ordinary people in Britain are more worried about the safety of their streets than that of the Euro. And if the Pact were to be enforced with little scope for flexibility, concern about the fate of public services could prevail in the debate at home. SIMPSON: It will undermine the referendum campaign and far from the Euro appearing to be Britain's destiny I think it will be recast as Europe's folly. It's not an issue that will prove to be a selling point for the British public, whether or not the Prime Minister feels destined to be part of it. BUONADONNA: The fight against crime may need more than a few extra policemen, yet policing the Euro is proving to be more complicated still. Despite its name the Stability Pact is adding to the uncertainty surrounding the Euro on both sides of the channel.
NB. This transcript was typed from a transcription unit recording and not copied from an original script. Because of the possibility of mis-hearing and the difficulty, in some cases, of identifying individual speakers, the BBC cannot vouch for its accuracy.