European Central Bank Say It's `Concerned' About Easing of Deficit Limits
ECB `Seriously Concerned' About Looser Deficit Limits (Update1)
March 21 (Bloomberg) -- The European Central Bank said it is ``seriously concerned' about finance ministers' decision yesterday to ease limits on budget deficits in the dozen countries that use the euro.
``Sound fiscal policies and a monetary policy geared to price stability are fundamental for the success' of the euro, the Frankfurt-based ECB said today on its Web site. In a separate e- mailed statement, the Bundesbank said the changes to the rules ``diminish the incentive to follow a solid budgetary policy.'
European finance ministers last night agreed to let countries using the euro top the deficit ceiling of 3 percent of gross domestic product when growth is slower than forecast or ``relevant factors,' such as Germany's costs for rebuilding its ex-communist East, force up spending. Germany, which insisted on the rule before the euro's debut in 1999, has breached it for three years.
Germany, France and Italy say they need more room to increase spending or cut taxes to revive their economies, which have trailed the U.S. for 12 of the past 13 years. Europe's growth stagnated at 0.2 percent in the fourth quarter and the German and Italian economies, which make up half the 12-nation $10 trillion euro region, contracted. Unemployment in Germany rose to a postwar record of 5.22 million in February, a rate of 11.7 percent.
Rate Risk
The ECB has warned that a looser deficit pact may fuel inflation, forcing up interest rates. ``Changing the pact could push up borrowing costs in all countries in the union,' ECB council member and Bundesbank President Axel Weber said in an interview last week.
``It is essential that all parties concerned fulfill their respective responsibilities,' the bank said today. ``The public and the markets can trust that the governing council remains firmly committed to deliver on its mandate of maintaining price stability.'
The ECB has left its benchmark interest rate at 2 percent, a six-decade low, since June 2003 to boost growth.
``Everybody knows that whatever happens the ECB will deliver price stability,' ECB President Jean-Claude Trichet said on March 14. ``But our life would be totally different' when policy makers change the pact. The bank aims to keep the annual pace of consumer price increases in the euro region just under 2 percent.
Inflation Accelerates
Inflation in the euro area accelerated to 2.1 percent in February, the European statistics office said today, as the cost of oil surged 38 percent this year. The ECB said this month that average inflation this year will fall below the bank's 2 percent limit for the first time in five years in 2005.
``I don't think the ECB will tighten or even bring forward tightening, but it does reinforce their bias,' said Ian Stewart, chief European economist at Merrill Lynch & Co. in London. Loosening the pact puts ``an upside risk to rates in the medium and longer term.'
The euro fell against the dollar today, weakening to $1.3182 at 4:48 p.m. in Frankfurt, compared with $1.3326 on Friday.
``The markets could punish them in some way after yesterday's decision,' said Luigi Speranza, an economist at BNP Paribas SA in London. ``These factors that permit countries to exceed the 3 percent threshold are too vague.'
Europe has outpaced the U.S. only once since 1991. That was in 2001, when the euro region expanded 1.6 percent and the Sept. 11 attacks contributed to reducing U.S. growth to 0.8 percent, according to EU figures.
Greek Record
Germany and France have exceeded the deficit limit since 2002. Figures showing Italy at the limit in 2004 may be revised higher, the EU statistics office said last week. Greece posted a 6.1 percent deficit in 2004, the highest of any country in the currency's six-year life.
Dominating the debate was Germany's demand that the EU acknowledge the costs of subsidizing the eastern states following unification in 1990 as the leading strain on German public finances.
To meet that demand, the EU decided that spending on the ``unification of Europe' could be used to excuse excessive deficits ``if it has a detrimental effect on the growth and the fiscal burden of a member state.'
Under the existing rules, countries could only expect leniency if their economies contracted by an annual rate of 2 percent. Finance ministers said that was ``too restrictive,' and instead agreed that exceptions could include ``a negative growth rate' or ``a protracted period of very low growth.'
Five Years' Grace
In a further concession, the EU agreed to give countries with excessive deficits two years to get back under the limit, renewable for two more years. Since the EU takes a year to act on national budgets, that would effectively allow deficits to stay above the limit for five years.
EU government leaders will ratify the accord at a Brussels summit on March 22-23 and give the European Commission, the EU's executive agency, the job of rewriting the legal texts that make up the stability pact.
German Chancellor Gerhard Schroeder, fighting rising unemployment and falling popularity, last week upped the pressure for more lenient enforcement of the stability pact by announcing corporate tax cuts, even as Germany's deficit risks exceeding the 3 percent limit for the fourth year in 2005.
His Finance Ministry said today that the government is still targeting a deficit of 2.9 percent of GDP this year. ``This will not be changed by the accord reached yesterday,' spokesman Stefan Giffeler told reporters in Berlin.
France also needed to come away from the Brussels meetings with a victory to shore up sagging support for the EU's planned constitution in the runup to a May 29 referendum. Italian Prime Minister Silvio Berlusconi is promising tax cuts, which he first pledged in 2001, before next year's national election.
``From a bond manager's perspective this is not a good combination,' said Andrew Bosomworth, a fund manager at Pacific Investment Management Co. in Munich. ``They didn't save when times were good and now they are asking for more room to spend when times are bad.' |
