OECD opposes ‘3&percent;’ fixation

Date: 12/06/1997

By Tim Jones

THE single currency debate has become far too focused on the need to hit the fiscal qualification targets this year, sometimes to the detriment of sound budgetary management, warns the Organisation for Economic Cooperation and Development.

As governments and financial markets await the publication of the Paris-based organisation's key Economic Outlook for 1997-98 on Wednesday (18 June), the economist who compiles the forecasts sounds a note of caution.

“It would be wrong to look at these figures and say: 'This country is going to make it and this one is not',” warned Paul Atkinson, head of the OECD's economic prospects division, in an interview with European Voice. “All the figures say is where each country seems to be at the moment, while there is plenty of time to take new action to achieve the targets.”

To qualify for membership of the euro-zone in January 1999, governments must have achieved low inflation, currency stability and 'sustainability' of their budgets during 1997.

Crucially, they must have cut budget deficits to 'close to' 3&percent; of gross domestic product.

Since the Maastricht Treaty was agreed six years ago, this 3&percent; target has come to be accepted as an absolute ceiling, above which it would be impossible to take part in economic and monetary union. The OECD forecasts will thus be seized upon for signs that the budget deficits of the key EMU front runners - Germany and France - will overshoot it.

Atkinson condemns this approach as wrong-headed.

“We take the view that a single number has attracted too much attention in 1997 and people have become excessively focused on it,” he insisted.

While recent European Commission forecasts showed Germany and France hitting the 3.0&percent; target this year, the OECD is expected to fall in with the International Monetary Fund (IMF) by forecasting deficits of between 3.0&percent; and 3.5&percent; of GDP.

But it is the trend in the budgetary performance that people should watch rather than the 1997 estimate, says Atkinson.

“Some people have suggested that 3.0&percent; is a success and 3.05&percent;, which is rounded up to 3.1&percent;, is a disaster. This seems to take no account of the cyclical situation and does not seem a sensible way to make fiscal policy, which should focus on the medium term,” he said.

This is the whole point of the 'stability and growth pact', which was due to be nodded through at next week's Amsterdam summit until the new French government upset the apple cart.

This pact, setting the rules for enforcing fiscal discipline in the euro-zone, would require members to keep deficits below 3&percent; of GDP at all times. During boom years, they should be close to balance. “Putting fiscal policy on a sound and sustainable medium-term path is much more consistent with what the stability and growth pact implies if there is to be some flexibility,” said Atkinson.

Governments should therefore pursue policies aimed at reversing long-run increases in public debt as a proportion of GDP rather than taking “precipitate action to meet a set number in a particular year”.

The OECD forecasts will show a continuation of the slow economic recovery which got under way last year, despite recent figures from both France and Germany showing slower than expected GDP growth.