ECB softens attacks on budgetary policy

Date: 22/07/1999

By Tim Jones

THE European Central Bank has decided to tone down criticism of governments' budgetary performance following the introduction of tough fiscal measures in the euro zone's three economic powerhouses, according to senior monetary officials.

Analysis of Italy's new four-year budget-cutting programme, Germany's surprise €15-billion package of public spending cuts and new French departmental spending caps has persuaded the ECB that its recent censorious monthly report has been overtaken by events.

"Nobody wants to praise the member states too much; it is like saying inflation is licked and it can make people complacent," said a central bank source. "But it is definitely true that several key governments have carried through some significant budgetary consolidation and that should not be ignored."

Sources said the ECB's new policy stance is being reflected in carefully crafted passages from speeches by members of the six-member executive board. The most positive so far came from monetary operations chief Sirkka Hämäläinen in a recent keynote speech.

"Even if there were some concerns a while ago about fiscal discipline and structural policies in the euro area, the prospects for stability-oriented fiscal policies and for the necessary structural measures have clearly strengthened recently," she said.

ECB officials believe that the French, German and Italian governments are now much more likely to meet their medium-term fiscal targets than they were only three months ago; a view reflected by Vice-President Christian Noyer in remarks following last week's governing council meeting. "Progress is being made," he said.

The bank's new stance represents a significant policy change compared with the controversial mauling given to government's in the ECB's March and June bulletins, and the sceptical reception which greeted the news that Italy would be allowed to miss its 1999 budget deficit target.

The Italian government's new four-year macroeconomic plan reaffirms Rome's commitment to narrowing the deficit to 1% of GDP in 2001, even with a scaling back of the targets for its primary surplus - once interest repayments are stripped out - from 5.5% over the next three years to between 4.6% and 5.1%.

The ECB's fiscal policy monitoring unit is said to be particularly struck by the budgetary rigour contained in letters sent last week to French ministries by Prime Minister Lionel Jospin and the politically explosive new round of austerity sought by German Chancellor Gerhard Schröder.

In the traditional first step of France's annual budgeting process, Jospin has capped departmental spending at 1999 levels and, with debt repayments stripped out, 'active' expenditure will grow at half last year's pace.

The bank's emollient stance is not shared across the whole 17-member council, with Nederlandsche Bank Governor Nout Wellink criticising his government's 2000 budget package for being insufficiently ambitious.

However, national economic policy experts say it has taken some of the burden off monetary policy at a time when the ECB has admitted that it is beginning to detect the re-emergence of inflationary pressures in the euro area.