Euroland governments face stricter budget enforcement

Date: 04/11/1999

By Tim Jones

EURO-ZONE governments will be prevented from tinkering with their budget deficit targets halfway through the year under a tough new code due to be agreed at the EU's Helsinki summit in December.

The change in the rulebook is designed to avoid a repeat of the furore in May after Italy was allowed to overshoot a 1999 deficit target it had set just seven months earlier by €4 billion.

A draft text prepared by top monetary officials for a meeting of Union finance ministers next Monday (8 November) would bind euro-zone governments to the commitments set in their four-year budgetary 'stability programmes' and prevent them from seeking changes to these when the Union's annual broad economic guidelines are drawn up in the late spring.

"The Council underlines the necessity of not reopening fiscal debates on subjects which have already been tackled in the opinions adopted by the Council," states the text drawn up by the EU's Economic and Financial Committee (EFC) on euro-area macroeconomic policy coordination. "In particular, fiscal objectives should be the same in the broad guidelines."

The May climbdown over the Italian deficit target was widely regarded as a serious blow to the financial markets' confidence in euroland budgetary policy.

Italy's stability programme, which was put together last autumn and subsequently approved by EU finance ministers, pledged a narrowing of the deficit to 2.0% of gross domestic product this year. But by January, it was clear that the growth forecast upon which the programme was based had been wildly over-optimistic.

In March, while pledging to stick to cabinet-approved caps on public spending and maintaining the 1%-of-GDP deficit target for 2001, Rome asked for permission to allow the deficit to fall to only 2.4% this year from 2.7% in 1998.

Permission was refused and the European Commission later reiterated the 2.0% target for 1999 in the non-binding broad economic guidelines it drafts every spring to steer general macro-economic policy throughout the Union.

At a showdown meeting in May, Italy's Treasury Minister Giuliano Amato demanded that the target be struck from the guidelines and won the day, much to the irritation of the Commission as well as German, French and Dutch ministers.

These ministers in particular are pushing for a tightly-worded agreement at Helsinki to prevent it happening again. This reflects concern about Italy's 2000 budget, which allots €2 billion to extra spending and tax cuts rather than debt reduction, and the prospect of Greek entry to the euro area in January 2001.

Both governments labour under huge public debt burdens, with interest repayments alone gobbling up 7-8% of their national income and making them particularly vulnerable to European Central Bank interest rate increases.

The final text may allow governments to vary from their programme targets, but only in the event of sudden and unforeseeable shocks. In these cases, both the Commission and the EFC would be expected to use their budgetary surveillance powers to the full and deploy the 'early warning system' laid out in the euro zone's fiscal rulebook. This allows them to question whether the forecasts underlying deficit-reduction targets are realistic and to monitor implementation of the programmes.

The declaration due to be adopted by EU leaders in Helsinki also seeks to quash fears that the Euro-11 Group - in which single-currency area finance ministers discuss euro matters without the British, Swedish, Danish and Greek delegations - will be put on a more formal footing.

Under pressure from Dutch and German officials, the paper states that the group's functions will not deviate from the tight guidelines agreed at a summit in Luxembourg in December 1997.

It says Euro-11 ministers "will deepen their discussion of issues connected with their shared and specific responsibilities for the single currency in line with the conclusions of the Luxembourg European Council".

Euro-zone governments will be prevented from tinkering with their budget deficit targets halfway through the year under a tough new code due to be agreed at the EU's Helsinki summit in December 1999.