Outlook: Europe's instability pact demands urgent reform

The latest outbreak of squabbling in euroland, with Britain loudly cheering Germany from the sidelines, does not reflect well on anyone, but for the already sickly euro, it is little short of disastrous. Blame is none the less easy to apportion. It lies with the inflexibility of the stability pact, a series of fiscal rules demanded by Germany for the purpose of keeping the smaller, financially weak nations in check, but now coming back to haunt Europe's biggest economy.

The European Commission didn't have to rebuke Germany over its budget deficit. Germany is not yet in breach of the rule that forbids a deficit of any more than 3 per cent of GDP, nor is it likely to be. In fact, the forecast deficit for this year is only 2.7 per cent, and in cyclically adjusted terms, it is heading lower. What's more the prospect of being fined for a breach of stability pact rules is even more remote, and indeed is so unlikely as to be barely worth considering.

Even so, Pedro Solbes, the European economic and monetary affairs commissioner, has chosen to make an issue of it, and, pour encourager les autres, he would still like to show the yellow card if he were allowed to. Ireland and others have already been censored for much less serious offenses under the separate "broad economic policy guidelines". Sometimes Mr Solbes seems like the officious parking warden who gives you a ticket for being only a few minutes out of time on the meter, but he would be right in thinking it looks bad to apply one set of rules for the little guys, and altogether more lenient ones for the bigger nations.

All the same, the issue has got blown up out of all proportion. The wording of the initial rebuke was so mild that the German Chancellor, Gerhard Schroder, could surely not have taken offence at all but for the fact that he faces an election this year. Gordon Brown's opposition to the rebuke seems likewise more driven by domestic political considerations than anything else. We are not members of the euro, so what does it matter other than as an opportunity for sounding a eurosceptic note.

If Britain was a member of the single currency, it too would be getting a dressing down right now. Mr Brown's spending plans put us in breach of the rule that requires a budget close to balance over the medium term, even though in most respects our public finances are in much better shape than elsewhere. There are only meant to be five economic conditions that have to be met before a euro referendum can be called, but Mr Brown seems to suggest more almost by the week. We've already had reform of European Central Bank to bring it more in line with the operation of Britain's own independently operated monetary policy. Now we have the stability pact as well.

That said, the case for stability pact reform grows stronger all the time. Nobody in their right mind would argue it should be dismantled in its entirety. Politicians are politicians and without the mechanism of the capital markets to punish them when they step out of line, they need strong rules on fiscal discipline or they would quickly spend the euro into the most terrible mess.

None the less, the pact needs to be more flexible than it is. The yellow card system Mr Solbes is attempting to apply helps no one. Germany has not controlled its public spending as well as it should but with the country either in or close to recession, it is hard to argue that drastic cuts are the right approach. Likewise in Britain, where public debt as a proportion of national income is less than 40 per cent, against a eurozone average of 62.5 per cent. Britain is suffering from acute underinvestment over man years in key infrastructure, and in these circumstances, borrowing to invest seems an entirely reasonable thing to be doing, especially during an economic downturn.

Mr Brown's ego on these matters scarcely needs massaging any more than it already has been, but the system of fiscal disciplines he has put in place for Britain does seem genuinely better than those the eurozone is muddling along with. Small wonder that all a big country such as Germany has to do is kick against them and the European Commission crumbles. They were never appropriate in the first place. Today's meeting of European finance ministers will no doubt succeed in further watering down the wording of the German rebuke, but it should also be used as a platform to begin, at least, the debate over stability pact reform.

Mountainous task

Transport For London virtually needed a forklift truck to take delivery of the contracts on the public private partnership for the Tube yesterday. In total, the three contracts ran to 137 different documents, or two million words covering 3,000 pages. If burying his opponents under a mountain of legal and commercial gobbledegook were Stephen Byers' intention, then the Transport Secretary has most certainly succeeded.

The bottom line, however, is this. The great bulk of the money to pay for the upgrades comes from the public sector, either in the form of passenger revenues or from grants paid for by the taxpayer. Of the £3.9bn balance, some 95 per cent is underwritten by the Government, so virtually no risk transfer has been achieved. Furthermore, the contracts allow for some very handsome rates of return. You begin to wonder what the point of it all is given that the supposed savings over the public sector alternatives are so marginal and questionable as to be pretty much meaningless.

The Government insists it needs the private sector to help plug the investment gap, but the tax payer ends up paying anyway. The PPP amounts to little more than an exercise in creative accounting of a type that even Andersen wouldn't have any difficulty seeing through. It's the modern way, says the Government. So did Enron's Kenneth Lay.

Tomkins and pay

No wonder it has taken Tomkins 16 months to appoint a new chief executive. Most of the time must have been spent drawing up his pay package. Greg Hutchings, the previous incumbent, was forced out after details of the corporate excesses he enjoyed in the privacy of his penthouse apartment and company jet came to light. The corporate excess being lavished on Jim Nicol, on the other hand, could not be more public, having been spelt out in graphic detail in the Tomkins press release.

Mr Nicol's pay package is worth a bare minimum of £5m over three years but could net him as much as £36m – not bad for running a middle ranking FTSE250 company when Ben Verwaayen was only offered £9m to rescue the basket case known as BT. Mr Nicol probably does not understand what all the fuss is about. In his native North America, a package of this size would barely pass comment, even in these days of post-Enron boardroom rectitude.

But over here, the corporate governance police will be choking over their cornflakes. David Newlands, the Tomkins chairman, has decided to meet the inevitable wave of protest head on by ignoring it. He has a point of sorts. If Mr Nicol comes anywhere close to earning his full whack, then Tomkins shareholders will not be complaining. The problem, as usual, is that his payment for just getting out of bed remains alarmingly high, as does the reward for failure.

j.warner@independent.co.uk