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EU's G4 leaders call for looser rules on deficits and public aid

Latest update : 2008-10-06

Leaders from Europe's main economic powers called for a looser application of EU deficit and state aid rules in the face of the credit crunch, during a mini summit on the crisis hosted by French President Nicolas Sarkozy in Paris.

Watch our Top Story: "Europe split over financial crisis?"


Leaders from Europe's leading economic powers called on Saturday for a looser application of EU deficit and state aid rules in the face of the credit crunch, amid tensions over how much leeway to allow.

Despite efforts to present a united front amid the turmoil spreading from Wall Street, differences emerged over just how much public finance rules, enshrined in the Stability and Growth Pact, could be eased.

"The application of the Stability and Growth Pact should reflect the exceptional circumstances that we find ourselves in," said French President Nicolas Sarkozy.

The French leader has long sought more leeway on the European Union's public finance rules, with France struggling to keep its deficit to less than three percent of output as required by the pact.

However, Germany, which is counting on wiping out its deficit entirely this year, has consistently resisted French calls for more wiggle room on public finances.

Luxembourg premier Jean-Claude Juncker, the chairman of eurozone finance ministers, insisted that leaders had agreed in Paris that that pact had to be respected "in its entirety" despite the financial crisis.

"We're not going to let the deficits run up, that would be a bad policy," Juncker said.

"An accumulation of deficits and a return of the debt spiral is without a doubt dangerous and would add nervousness to the nervousness that is already quite big," he said.

European Commission chief Jose Manuel Barroso, whose institution polices public finances in Europe, also said that the stability pact allowed sufficient flexibility to cope with the situation.

"It is very important the Stability and Growth Pact (which) I believe allows us the necessary degree of flexibility," he said.

With tax revenues falling amid sharply slowing economic activity, public finances are coming under growing strain and raising fears that the three-percent deficit level will be increasingly difficult to respect.

Despite cracks in their unity over deficit rules, leaders agreed that the European Commission should show flexibility when it considers state aid decisions in the crisis-struck banking sector.

"In the current circumstances, we stress the need for the commission to continue to act quickly and apply flexibility in state aid decisions, continuing to uphold the principles of the single market," they said.

As Europe's top competition watchdog, the commission is responsible for ensuring that state aid to struggling companies does not risk giving unfair advantages to companies.

As the US-born crisis whipped across Europe over the last week, some EU countries hastily arranged dramatic state bailouts to ensure various banks' survival and avert a broader financial meltdown.

While often accused in the past of blocking crucial aid for failing firms, the commission has made a point of fast-tracking its state aid reviews for troubled banks and shown no intention of vetoing help for them.

Shortly after clearing Britain's nationalisation of troubled lender Bradford and Bingley on Wednesday, EU Competition Commissioner Neelie Kroes said: "EU competition rules are fit to the current test of the banking crisis."

At the time, she also said the the partial nationalisation of troubled Dutch-Belgian bank Fortis should not pose a state aid problem and promised a quick review of a 6.4 billion euro bailout of French-Belgian bank Dexia.

Date created : 2008-10-06