ECB increases pressure on governments to cut deficits

Date: 07/01/1999

By Tim Jones

THE European Central Bank will step up its campaign next week to bring euro-zone government budget deficits under control.

Central bank officials including ECB vice-president Christian Noyer will use the inaugural meeting of the EU's Economic and Financial Committee in Brussels on Tuesday (12 January) to warn finance ministers' top staff against taking their eye off the budgetary ball.

ECB chief economist Otmar Issing says he has detected "very dangerous" signs that governments are relaxing their fiscal rigour and risk missing their target of balancing euro-zone budgets by 2002.

European Commission representatives will restate their belief that several finance ministers are relying too much on the impact of economic growth to narrow their budget deficits. Commission economists claim that structural deficits - the gap between spending and revenues once the effects of growth are stripped out - are still too wide.

ECB President Wim Duisenberg has hinted that further cuts in the bank's key interest rate will depend on a return to budgetary austerity.

The new European currency was launched on to the financial markets this week amid great fanfare, quickly gaining against the US dollar and catalysing a buying spree of stocks and bonds in the 11-nation euro area.

Economists expect the ECB to cut rates by at least 0.25 of a percentage point to 2.75% within the coming three months as economic growth slows and the euro continues to strengthen.