Schröder launches attack on stability pact

Gerhard Schröder, the German Chancellor, has launched a wide-ranging attack on the European stability and growth pact in comments that could open up a new row between Berlin and Brussels.

Gerhard Schröder, the German Chancellor, has launched a wide-ranging attack on the European stability and growth pact in comments that could open up a new row between Berlin and Brussels.

Mr Schröder said the pact needed to be interpreted to allow countries to run up deficits during recessions. "It is a tool, not a religious belief," he said during a visit to London.

He stressed that Germany, which was a key author of the pact that bars members of the euro from racking up a deficit higher than 3 per cent of GDP, supported it "in principle".

Both Germany and France broke the rule last year, prompting the eurozone's finance ministers to suspend the pact to prevent the European Commission from imposing large fines. This move was seen as denting the credibility of the pact and the Commission won its legal battle this week to overturn the ministers' decision.

However, an ambiguous ruling by the European Court of Justice has reopened a debate over the need to reform the pact.

Speaking at a dinner at the German Embassy in London, Mr Schröder said: "The growth and stability pact is right in principle because a common currency needs a set of rules.

"But it is a set of rules and the question is whether it is an adequate set of rules. I would say I do have some doubts because it is something that can make the corset too tight."

He said he was not calling for its abolition but for a more "growth-oriented interpretation", adding: "Saying countries should be forced to make tough [budget] cuts is dangerous because it will achieve the opposite of what they wish to achieve."

A government spokesman said Germany wanted to be able to run a deficit as long as it balanced the budget across the economic cycle, allowing it to cut taxes or boost spending to alleviate the pain of recession.

His comments mean Germany backs the UK's long-standing demand that the eurozone copy the Treasury's fiscal rule that the Government must deliver a balanced budget averaged over an economic cycle. The UK racked up a deficit of £33bn, or 3.3 per cent of GDP, but insists that over the 1999-2006 cycle it will return a surplus of £11bn.

Analysts believe the pressure on Brussels to amend the pact will grow as German companies press ahead with massive cost-cutting plans. DaimlerChrysler became the latest firm to demand restructuring, threatening 6,000 job cuts unless staff agreed to a longer working week for no extra pay.

Mr Schröder's government has embarked on an ambitious programme of reforms, Agenda 2010, that will cut taxes but raise health and pensions charges and impose tough new unemployment benefit rules.