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The Eu's Fiscal Moralist (Int'l Edition)


International -- Finance: Europe

The EU's Fiscal Moralist (int'l edition)

Economic Affairs Commissioner Solbes has Ireland in his sights

When European Union Finance Ministers meet in Brussels on Feb. 12, Pedro Solbes intends to present them with a shocking proposition. Solbes is the European Commissioner for Economic and Monetary Affairs--a kind of finance minister for all of Europe. It's a position without much teeth, but Solbes wants to change that. So he's pushing his national counterparts to do something they have never done before: Officially censure an EU member in good standing--Ireland--for spending profligately, cutting taxes too much, and pumping up inflation to one of the highest levels in the EU.

It's a bold, almost impudent, move for a mere EU commissioner. An act of censure would challenge one of the last remaining areas of sovereignty for euro-zone countries: control over their own budgets. "Now that we have the single currency, we also must be coherent with our fiscal policy," Solbes declares.

Meet the man who would be Europe's financial boss. The 58-year-old Spaniard's primary role is to manage the giant logistical challenge of introducing euro notes and coins on Jan. 1, 2002. But he has also given himself the mission of getting Europe's governments to run their economies from the same orthodox rulebook.BIPARTISAN. Solbes' challenge to Dublin highlights the quixotic nature of his goal. While the Maastricht Treaty that governs monetary union requires its members to stick to an array of financial targets or suffer sanctions, it doesn't say Brussels has any business telling them how to get there. The fact is that Solbes' powers are limited mostly to moral suasion. Moreover, it's one thing to take on a small country. It would be quite another to face off against a large one.

A balding, gray-bearded man who speaks in a low drone, Solbes started his political career under the Franco dictatorship in the early 1970s, when he was posted in Brussels to negotiate agricultural trade agreements. "He's much more of a technician than a politician," says Fernando Fernandez de Troconiz, a parliamentary deputy from Spain's conservative Partido Popular.

In 1993, Spain's Socialist Prime Minister Felipe Gonzalez named the pragmatic and reassuring Solbes as Finance Minister at a time when the government faced both recession and corruption scandals. Solbes "was solid," says Bank of Spain Governor Luis Angel Rojo. Solbes hammered public finances into shape, helping to slash inflation by half. That set the stage for Spain's eventual adoption of the euro. And even though the Socialists lost power, Solbes was an obvious bipartisan nominee for the chief economic post in 1999.

Solbes believes in textbook fiscal rigor. He fears that recent tax cuts and big increases in public spending among EU nations could undermine the euro's recent recovery and the Continent's renewed economic growth. That's why he wants to slap the Irish. Although Ireland's budget is in surplus, Solbes says the country's economy, which should grow more than 8% this year, will overheat if Dublin proceeds with the spending increases scheduled for this year. As proof, Solbes argues, underlying Irish inflation, excluding falling energy prices, accelerated in December by 4%.COUNTERPUNCH. His position has ignited a storm of controversy. The Dublin government, using different criteria, argues that Irish inflation is falling. It has also rejected the anticipated reprimand, which it deems a diplomatic affront, and is lobbying hard to get it watered down. Instead of calling for a specific cut of almost $500 million in public spending, Irish diplomats in Brussels say they are confident the finance ministers will call for unspecified "restrictive budgetary measures."

Some economists believe Solbes' recommendations are misguided because tiny Ireland cannot infect all of Europe with its inflation. Besides, "because Ireland is such a small, open economy, no fiscal policy can reign in the boom, only more restrictive monetary policy," argues Daniel Gros, director of the Center for European Policy Studies in Brussels.

That's impossible since Ireland's central bank no longer sets rates for the country. The European Central Bank does that, and it pegs its rate to Europe as a whole. It's also hard for Solbes to force budget cuts on a recalcitrant EU state. "My main power is peer pressure," he concedes.

But would he attempt to impose such pressure on Germany, France, or Britain? Solbes insists that he would. In fact, on Feb. 7, he proposed that national governments inform his office and other European finance ministers before they undertake any huge changes in fiscal policy. It's a gutsy proposal, and tough to pull off. But Solbes will keep pushing.By William Echikson in Brussels, with Andy Robinson in MadridReturn to top


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