Germany calls for EU reform

German Chancellor Gerhard Schroeder has called for radical reform of the EU's stability pact to grant countries more flexibility over their budget deficits.

Mr Schroeder said existing fiscal rules should be loosened to allow countries to run deficits above the current 3% limit if they met certain criteria. Writing in the Financial Times, Mr Schroeder also said heads of government should have a greater say in reforms. Changes to the pact are due to be agreed at an economic summit in March.

The current EU rules limit the size of a eurozone country's deficit to 3% of GDP. Countries which exceed the threshold are liable to heavy fines by the European Commission, although several countries, including Germany, have breached the rules consistently since 2002 without facing punishment. The European Commission acknowledged last month that it would not impose sanctions on countries who break the rules.

Mr Schroeder - a staunch supporter of the pact when it was set up in the 1990s - said exemptions were now needed to take into account the cost of domestic reform programmes and changing economic conditions. "The stability pact will work better if intervention by European institutions in the budgetary sovereignty of national parliaments is only permitted under very limited conditions," he wrote. "Only if their competences are respected will the member states be willing to align their policies more consistently with the economic goals of the EU."

Deficits should be allowed to rise above 3%, Mr Schroeder argued, if countries meet several "mandatory criteria". These include governments which are adopting costly structural reforms, countries which are suffering economic stagnation and nations which are shouldering "special economic burdens". The proposed changes would make it harder for the European Commission to launch infringement action against any state which breaches the pact's rules. Mr Schroeder's intervention comes ahead of a meeting of the 12 Eurozone finance ministers on Monday to discuss the pact. The issue will also be discussed at Tuesday's Ecofin meeting of the finance ministers of all 25 EU members. Mr Schroeder also called for heads of government to play a larger role in shaping reforms to the pact. A number of EU finance ministers are believed to favour only limited changes to the eurozone's rules.