Santer tries to whip French into line

Hopes look slim for a deal on stability pact, writes Sarah Helm in Brussels

In a hurried attempt to secure French acceptance of the controversial "stability pact" for the the single currency, Jacques Santer, the European Commission President, will hold emergency talks with French leaders tomorrow in Paris.

However, there appears to be only slim hope that a deal can be brokered in time for the Amsterdam summit next week, when the pact was to have been signed.

The current terms of the stability pact have taken nearly two years to formulate and are unlikely to be rewritten in a few days. The pact was finalised in outline during tough bargaining between Germany and the previous French government at the Dublin summit in December.

The driving force of the pact, terms for which were originally tabled by Germany, is to ensure strict fiscal discipline between member states who join the euro zone.

The German intention has always been to ensure the permanent elimination of structural budget deficits. The method Bonn chose to apply under the pact was a system of sanctions to be imposed against backsliders. France has always baulked at the severity of the sanctions demanded by Germany and succeeded in diluting the terms in Dublin, when the deal was renamed a "stability and growth" pact.

The present rules state that any country which allows its budget deficit to exceed 3 per cent of gross domestic product (GDP) after joining the euro zone will be liable to a sliding scale of fines to be imposed by other member states, on advice from the Commission. The maximum fine which can be imposed amounts to half a per cent of that country's GDP. If the country does not correct its deficit, the money is distributed among the other euro members.

Only in "exceptional circumstances" can the sanctions be set aside. Such exceptional circumstances can be a natural disaster or a serious recession.

Mr Jospin now appears to favour transforming the pact into a "pact for jobs" as well as a pact for stability and growth. However, economists question how rules and sanctions could be so easily applied to countries which do not meet employment targets.

Underlying French complaints about the pact is a deeper concern about how policies for the euro zone should be formulated. Many observers believe Mr Jospin is holding the stability pact "hostage" to pursue his wider aim of securing a form of economic government, run by politicians rather than central bankers, for the euro.