Sunday, March 20, 2005; 5:04 PM
By Lisa Jucca and Marie-Louise Moller
BRUSSELS (Reuters) - European Union finance ministers clinched an provisional deal on Sunday to ease their much flouted budget rules after Germany won its key demand for special treatment for its huge unification costs.
A Luxembourg presidency source said ministers agreed in principle after nearly 11 hours of emergency talks to a rewriting of the Stability and Growth Pact that EU leaders are expected to endorse at a summit beginning on Tuesday.
The compromise offered the prospect of leniency for excess deficits incurred due to "the reunification of Europe," a veiled reference to the billions Berlin spends on former communist eastern Germany.
"There is an agreement in principle but there are still some technical details that will need to be clarified by Tuesday," the source told Reuters.
Austrian Finance Minister Karl-Heinz Grasser earlier said it would be "a bit of a joke" to exempt spending on an event that happened 15 years ago, after the fall of the Berlin Wall.
Luxembourg Prime Minister Jean-Claude Juncker, who convened the extraordinary Sunday session, was due to announce the deal at a late night news conference.
The source said the only issue which needed to be clarified before the summit was the legalities of accounting for the cost of pension reforms by countries which exceeded the EU deficit limit of 3 percent of gross domestic product.
The pact was established at Berlin's insistence to underpin the euro by preventing governments overspending, but Germany has ended up breaching the pact's limits on deficits for three years running, as has France.
Greece is way over the limit too and Italian Prime Minister Silvio Berlusconi threatened ahead of Sunday's talks to go into battle against meddling from Brussels after EU statistics office Eurostat questioned Rome's deficit reporting.
The pact can lead to fines of billions of euros but attempts by the European Commission to take Germany and France to task for serial breaches during a time of sluggish economic growth have been blocked, leading to the revamp negotiations.
In an effort to break the deadlock of recent months, Juncker floated proposals which will give countries more wiggle room to justify breaches of the deficit limit -- which remains at 3 percent of gross domestic product -- and avoid punishment.
One of the other big sticking points at the wider level of the 25 EU ministers is demands from newcomers such as Poland and Hungary for exceptions so that spending on pension reforms is not counted in their deficits.
That would help them qualify to join the euro.
While financial markets have paid scant attention to the struggle over the pact, the European Central Bank has suggested that it could be forced to raise interest rates if government deficits get out of control because of looser rules.
Germany is estimated to spend some 4 percent of GDP or 80 billion euros a year to help rebuild the economic fabric of the former east Germany, so exclusion of those amounts would make it easier to respect the pact's deficit limits.
But Austria's Grasser said: "It's not new. If we start now to take into account spending that has existed for a long period of time, it would be bad budgetary policy."
Juncker's attempts to broker a deal offered something for everyone in terms of excused spending.
Among them was spending on development aid, which France wants, public investment, which Italy wants, and R&D spending, plus structural reforms such as changes to pensions systems and a very vague get-out clause for public spending that goes toward "achieving European policy goals."
Britain's support might be secured by a clause subtly worded to let London off a provision urging governments to reduce their deficits by half a percentage point in years of good growth.
The wording applied to euro zone members and countries in the EU's exchange rate mechanism. Britain is in neither.