World Business
EU finance chiefs rule out continent-wide austerity drive
By James G. Neuger and Stephanie Bodoni (China Daily)
Updated: 2010-05-19 11:12
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Olli Rehn, European Union economic and monetary affairs commissioner, holds a chart at a press conference in Brussels, Belgium. [Jock Fistick / Bloomberg] |
BRUSSELS - European finance ministers said Greece's debt crisis won't unleash a continent-wide austerity drive with the potential to tip the economy back into a recession and further undercut the euro.
Only high-deficit countries including Spain and Portugal will be ordered to make additional deficit cuts, while budget policies will remain untouched in better-off nations such as Germany and Finland.
"Not everyone will accelerate consolidation in a very uniform way," European Union Economic and Monetary Affairs Commissioner Olli Rehn told reporters in Brussels on Tuesday after a meeting of ministers from the 16 euro countries. "That would lead to a very restrictive fiscal stance for the euro area as a whole, which would risk depressing economic growth."
Concern that tight fiscal policies would choke the economy contributed to the euro's 3.4 percent drop against the dollar in the week since euro leaders offered a 750 billion-euro ($925 billion) rescue package for debt-burdened governments.
The meeting of the 27 European Union finance ministers is set to adopt a draft law to tighten hedge-fund regulations that has drawn objections from the United Kingdom and the United States.
The euro fell on Tuesday to its lowest level against the dollar since April 2006, slipping as much as 0.7 percent to $1.2315. It was unchanged at $1.2395 as of 8:20 am in London.
The core of the loan package, a 440 billion-euro fund backed by national guarantees that would buy distressed countries' bonds, will be set up with the help of the European Investment Bank and will operate under Luxembourg law.
The euro-area ministers will meet again on May 21 to work on "a certain number of technical details" of the unprecedented emergency lending mechanism, said Luxembourg Prime Minister Jean-Claude Juncker, who chaired Monday night's Brussels meeting.
The euro-area economy expanded 0.2 percent in the first quarter, faster than the 0.1 percent forecast by economists, as a global recovery boosted exports, offsetting consumers' reluctance to increase spending.
The International Monetary Fund said last month that the region's economy may expand only 1 percent this year, even as the Washington-based institution raised its global growth forecast for this year to 4.2 percent from 3.9 percent, citing a faster expansion in emerging economies including China.
Finance chiefs said there is no reason for global investors to desert the euro, touting the European Central Bank's record in keeping inflation close to its 2 percent ceiling during the currency's first 11 years.
"The euro is a credible currency," Juncker said. "Price stability has been fully maintained in the euro area over 11 years and will equally be maintained in the years to come. This is a major feature of the euro and a major asset for investors."
Spain last Friday unveiled the biggest budget cuts in at least 30 years to bring down a deficit estimated by the EU at 9.8 percent of gross domestic product this year, more than three times the bloc's 3 percent limit. Portugal followed a day later, pledging to slash wages and raise taxes to pare its projected 8.5 percent shortfall.
"Every time you do some cuts in the budget it is possible to have a small contraction in the economy," Spanish Economy Minister Elena Salgado said. "But we think this moment the balance has to be on the fiscal consolidation side."
Italian officials said on Sunday that the government may make an extraordinary reduction in a deficit projected by the EU to hit 5.3 percent of GDP this year. France, heading for an 8 percent deficit, is slated to submit its latest spending and tax plans to the EU this week.
In a first discussion of improvements to Europe's economic management, the ministers concluded that proposals for better coordination of national budgets, speedier penalties for violators and stricter monitoring of high-debt countries "go in the right direction", Juncker said.
Under the euro's German-inspired Stability and Growth Pact, countries with deficits above the 3 percent limit face fines as high as 0.5 percent of GDP unless they get the budget back into compliance.
No country has been fined during the euro's 11-year lifespan. Germany and France teamed in 2005 to dilute the rules after overstepping the limits for three years in a row.
Proposals by the European Commission would extend the threat of sanctions to cover countries that fail to push their budgets toward balance during "good economic times", even if the deficit is below the threshold.
Rehn also called for cutting off EU development-aid funds from the euro region's poorest countries more quickly to penalize any deficit overruns. Currently six euro countries - Cyprus, Greece, Malta, Portugal, Slovakia and Slovenia - are eligible for the "cohesion" fund, available to countries with GDP per capita less than 90 percent of the EU average.
Bloomberg News