Euro-11 vow to balance budgets

Date: 10/09/1998

By Tim Jones

EURO-zone governments have nailed down the last potential escape hatch from their fiscal control pact by agreeing to balance their budgets by the end of 2001.

To meet this ambitious goal, France, Germany and Italy will together have to find savings worth close to 100 billion ecu within the next three years, although most of this is expected to come from the fruits of economic growth.

The deal, which is expected to be published as a formal 'opinion' of the EU's monetary committee, is designed to define the words "medium term" which are scattered throughout the stability and growth pact.

This pact, agreed at the Amsterdam summit in June last year, obliges all its signatories to keep their government finances "close to balance or in surplus" over the "medium term".

The European Commission, whose job it is to police the pact, felt this wording was too vague to be enforceable and requested a bench-mark which could be used to assess whether the balanced-budget target had been met.

At no time are pact members allowed to run a budget deficit more than 3% of gross domestic product, unless they are struck by an external economic shock beyond their control.

Keeping the budget in balance or surplus during boom years means that external shocks which could drive them into recession, such as the fall-out from the current crises in South East Asia or Russia, could be offset by extra public spending or tax cuts without breaching the 3% ceiling.

The agreement adds political weight to the campaign waged by Economics Commissioner Yves-Thibault de Silguy before the summer break to persuade euro-11 governments to be more ambitious in slicing away at their 1999 budgets.

He warned them that they were failing to deal with their structural budget deficits (the gap between spending and revenue once the cyclical effects of economic growth are stripped out) and risked restricting their budgetary room for manoeuvre if they were hit by a recession.

Internal Commission forecasts suggest that even if member states make no further efforts to raise taxes or cut spending over the next four years, they will all bring their budgets into balance by the end of 2002. "If there is a little more effort, they could achieve this a year earlier," said an official.

Despite the ever-present risk of a crisis of confidence imported from Russia and Asia, the Commission is upbeat about growth prospects for the first years of the euro-11 and is assuming an average growth rate up to the end of 2001 of 3%.

Revised official forecasts will be published at the end of next month, but Giovanni Ravasio, the Commission's director-general for economic and financial affairs, told the European Parliament last week what his staff were planning. "On the basis of the most recent figures available, I don't think we are likely to have to make any major changes," he said.

The Commission believes that the arrival of the euro itself will give impetus to growth in the single currency area since intra-European currency turbulence, except against the British pound, will be eliminated and interest rates will not have to be raised to cope with the inflationary impact of swollen budget deficits.