Central Bank Governor Liikanen backs EU stability pact

Sees danger of short-sighted politics in euro zone

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Erkki Liikanen, the Governor of the Bank of Finland, strongly defends the Stability and Growth Pact of the European Union. In an interview with Helsingin Sanomat, Liikanen expressed concern over the possibility that financial discipline and budgetary restraint in the euro zone might give way to short-sighted political considerations.
      Although Liikanen expects that there will be some fine-tuning of the pact, he hopes that its criteria will remain quantitative - that is, that the pact should continue to set specific limits on deficits in the public finances of the euro countries.
      Changing the Stability and Growth Pact would require the support of all countries involved. Possible reforms are to be discussed at the EU's economic summit in March.
      Under present rules, the deficits in public finances must not exceed three percent of a country's GDP.
     
Moves are currently underway to lift the three percent rule, because the deficits of the large euro countries France and Germany are not keeping within the limits that have been agreed upon. On Monday, German Chancellor Gerhard Schröder came out for radical changes to the agreement, to allow euro countries more leeway in deficit spending.
      Liikanen feels that diluting the Stability and Growth Pact would jeopardise some of the most basic principles of the EU. "The idea of the EU is based on the notion that the use of power is replaced by the use of law. The decisive factor in decision-making is not how much muscle or how many votes each member state has: instead, issues are decided according to the law. The Stability and Growth Pact must be based on the same foundations. If the agreement is broken now, it will break a key aspect of EU principles", Liikanen says.
     
In Erkki Liikanen's view, relaxing the rules of the pact would not necessarily increase the member countries' room for manoeuvre. "We need to remember that the amount of independence is greatest when public finances are balanced. The situation is even better when public finances are cyclically in surplus, considering the costs threatening Europe due to the ageing of the population."
      "I understand the special problems of Germany. The costs of unification have been tremendous. On the other hand, Germany has lost much of its relative competitive advantage in interest rates, as the difference in the rates of the other countries in relation to the German mark have disappeared."
      Liikanen's support of the Stability and Growth Pact fit his new central banker's role quite well, considering that the European Central Bank has worked hard to defend the agreement.
      Liikanen adds that he had also supported the pact in his previous role as European Commissioner, although even the Commission President at the time, Romano Prodi, publicly criticised the agreement.
     
Liikanen's first six months as Governor of the Bank of Finland have gone quite well. "Perhaps the greatest surprise has been the close communication within the Council of the European Central Bank. I have calculated that members of the ECB Council meet each other more often than the European Commissioners do."
      The council members include the heads of the central banks of the 12 countries of Europe's Economic and Monetary Union. Official meetings take place twice a month, mostly in Frankfurt.
      "In addition, the members of the council meet at meetings of the Bank for International Settlements (BIS), and the International Monetary Fund (IMF)", Liikanen says.


Previously in HS International Edition:
  Erkki Liikanen in Washington: State of world economy unusually stable (5.10.2004)
  Commissioner Liikanen appointed by President Halonen to head Bank of Finland (23.4.2004)
  Liikanen appointment will not oblige him to give up EU Commissioner post (21.4.2004)
  Erkki Liikanen proposed as new Governor of Bank of Finland (16.4.2004)

Helsingin Sanomat