[A-List] EU stability & growth pact: IMF weighs in

["Michael Keaney" <michael.keaney@xxxxxx>]

IMF tells eurozone to heed stability pact
By Alan Beattie in Washington
Financial Times: October 30 2002

The International Monetary Fund has weighed into the debate over the
eurozone's stability and growth pact (SGP), arguing that the big three
countries - Germany, France and Italy - should heed its message and make a
concerted effort to tighten fiscal policy.

The IMF also cut its forecast for economic growth in the eurozone and said
that the European Central Bank should lean towards lowering interest rates -
a recommendation rejected by a representative of the eurozone authorities at
the IMF.

In its annual assessment of the eurozone economy, released on Tuesday, the
IMF admitted that the pact was "not beyond improvement", and welcomed the
new focus on correcting for the economic cycle when targeting fiscal
balance.

But it said: "The core of the recent difficulties is not the SGP, but the
difficulties the three largest countries are having in implementing fiscal
consolidation."

It said that Germany, France and Italy should tighten fiscal policy by 0.5
per cent of gross domestic product per year over the next several years
until their budgets were in balance.

"The SGP is a sound framework but it has a credibility problem," said
Michael Deppler, director of the IMF department which covers the eurozone.

A concerted effort by the big three would allow the ECB to plan for lower
interest rates, and would prevent the smaller countries backsliding on their
own efforts to tighten fiscal policy, he said.

The IMF's criticism follows a fierce controversy within the eurozone about
the stability and growth pact. Mr Deppler said he backed the European
Commission view that the pact was necessary to enforce fiscal discipline but
he said that the focus on setting nominal targets for budgets to be close to
balance by 2004 was misplaced.

In a gloomy assessment of the eurozone economy, the IMF cut its forecast for
growth this year to 0.75 per cent from its 0.9 per cent projection in
September, and to 2 per cent next year from its September forecast of 2.3
per cent.

There remained significant downside risks to the forecast, with indebted
companies and wary consumers possibly delaying the recovery, the IMF said.
The ECB should adopt a loosening bias, but the bulk of the responsibility
for boosting growth lay on structural reform in the eurozone economy, it
said.

In a statement released with the report, Harilaos Vittas, the Greek
executive director on the IMF's governing board, rejected the advice for the
ECB to lean towards reducing interest rates.