EU Governments Urged to Cut Deficits as Economy Slows, Kosovo Costs
Mount
EU Urged to Cut Deficits as Economy Slows, Kosovo Costs Mount
Dresden, Germany, April 17 (Bloomberg) -- European Union
governments pledged to cut their budget deficits even as the
economy slows and the war and refugee crisis in Yugoslavia
saddles the 15-nation bloc with a potentially huge bill.
EU finance ministers promised European Central Bank
President Wim Duisenberg that fiscal belt-tightening is a
priority again, while acknowledging that the war could push up
spending and put a further drag on growth.
''War costs a lot of money -- make no mistake about that,''
German Finance Minister Hans Eichel said after chairing a two-
day meeting of ministers and central bankers. ''And expulsion
costs an incredible amount of money.''
The central bank made clear that after slashing interest
rates for the 11 single-currency countries to record lows, it is
now up to governments to give business a push by getting rid of
regulations and bringing down taxes, especially on labor.
Italian Treasury Minister Carlo Azeglio Ciampi expressed
the strongest concern that the Kosovo war will dent growth in
the euro area, which is already expected to slow to 2.2 percent
in 1999 from 3.0 percent last year.
Italy, across the Adriatic Sea from Yugoslavia, temporarily
shut three airports because of the war, damaging regional
economies. Greece has been forced to reroute cargo to and from
northern Europe, adding to costs for business.
''This is a negative element,'' Ciampi said. ''European
economic conditions, particularly those in Italy, are worse than
expected. This introduces a further element of uncertainty and
concern.''
Europe's Laggard Economy
Hampered by budget cuts mandated by the euro project, the
Italian economy is already posting the slowest growth of the 11
countries that adopted the euro on Jan. 1. It is likely to
expand 1.6 percent this year, the European Commission forecasts.
Flagging growth in Italy and Germany were behind the
central bank's unexpectedly deep half-point cut in its main
interest rate to 2.5 percent on April 8. Duisenberg today
underscored the impression that no more cuts are in the
pipeline.
''The ball is now maybe more clearly than before in the
politicians' court,'' he said. The finance ministers confirmed
that they will resume the pursuit of balanced budgets, an area
where the EU lags far behind the U.S., Duisenberg added.
At the same time, the ministers indicated there are no
limits to the checks they are prepared to write to equip NATO
forces, provide food and shelter for refugees and rebuild the
Balkans after the war ends.
The bloc has pledged 800 million euros ($856 million) for
humanitarian aid in the first three weeks of the war. Today the
ministers endorsed a two-year moratorium on debt-service
payments for Albania and Macedonia, which are struggling with a
flood of over a half-million refugees.
The moratorium, if approved by the Paris Club of western
creditor governments, would cost around 150 million euros. ''It
goes without saying that we have to raise this money,'' said
Jacques Santer, the outgoing president of the commission, the
EU's executive agency.
Santer continues to serve in a caretaker role after
resigning along with the other 19 European commissioners last
month amid allegations of financial mismanagement. He will be
replaced by Romano Prodi, a former Italian prime minister, in
August.
Deficit Curbs
Euro states must keep their deficits below 3 percent. In
theory, the costs of the war in Yugoslavia could prompt them to
invoke treaty language that allows deficits to go above the
threshold in ''temporary and exceptional'' circumstances.
While the combined euro-area shortfall will dip to 1.9
percent of gross domestic product this year from 2.1 percent
last year, the bloc has long since jettisoned the informal goal
of wiping out its deficits by 2002.
Another unanswered question is whether Greece, one of four
EU states not using the euro, will weather the economic fallout
so it can meet its self-imposed deadline of 2001 for adopting
the new currency.
Still, Hans Tietmeyer, president of the German central
bank, said it is too early to assess the impact of the war on
the EU economy. The crisis ''has certainly raised volatility on
the markets but the ultimate effects remain to be seen,'' he
said.
The ministers and central bankers said they are unconcerned
about the euro's 8 percent drop against the U.S. dollar since
its debut. The slide reflects a buoyant U.S. economy and isn't a
sign of weakness in Europe, they said.
The ministers also quietly dropped a German proposal for a
new agency to manage EU efforts to promote employment, while
agreeing to include the central bank and labor and management
representatives in an occasional roundtable on economic policy.
A French proposal to bolster the policy-making role of the
smaller council of euro-11 finance ministers merits further
study, Eichel said.
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