ECONOMY

Fiscal discipline stressed

AMSTERDAM (Reuters) – The European Commission called yesterday for better budget discipline in the eurozone, saying countries had in the past sometimes used one-off steps to keep their deficits below the EU limit. «We have… seen many instances where attempts to comply with the deficit ceiling have led to the adoption of one-off measures, ‘creative accounting’ or pro-cyclical policies,» said Klaus Regling, director-general of the Commission’s monetary affairs division. The remarks were made in the text of a speech prepared for delivery at a conference on «The Euro after Five Years» and did not refer to any specific countries. Regling also reviewed the case for revamping the EU Stability and Growth Pact and said the improvements suggested by the Commission would bolster the credibility of the budget discipline rule book. He also reiterated the need to address shortcomings in national statistics in some member states. «The experience of the revision of the Greek fiscal data has shown this clearly.» Greece’s budget deficit data for the years between 2000 and 2003 were recently revised sharply upward. Michael Deppler, head of the IMF’s European Department, said that the eurozone’s biggest economies may need to make more effort if they are to deliver on promises that they will rein in their budget deficits. Deppler told Reuters the much-flouted Stability and Growth Pact had done a good job of encouraging fiscal discipline, but backed the European Commission’s plans to overhaul the pact’s budget discipline rules. Deppler added that the eurozone’s largest economies had a poor track record of improving their budget positions during economic upswings. Germany and France, which are expected to break the pact’s deficit cap for the third year in a row in 2004, plan to bring their fiscal shortfall below the EU limit of 3 percent of gross domestic product in 2005. Deppler said that the eurozone’s biggest economies typically intended to act prudently in fiscal terms but that it was not clear whether the right policies were in place. «The larger countries’ intentions barely meet the minimum criteria for (fiscal) adjustments during the upswing in 2005,» he said in an interview. There is «a concern as to whether countries are pushing forward enough on the fiscal side at this juncture» when there is an economic upswing under way, he added. While high oil prices may dent the outlook for eurozone growth somewhat, Deppler stood by the IMF’s recent decision to upgrade the bloc’s 2004 growth forecast. Silver lining Deppler said there was a consensus on the need to reform the Stability Pact, even though debates were rife about the best way to go about such a revamp. Recent massive revisions to Greece’s budget deficits between the years 2000 and 2003 would only strengthen the desire to make EU budget rules more credible. «There is a silver lining in this episode,» he said. «The Greek episode showed there is a need for more accountability by governments, more transparency, more auditing of these things. The Stability Pact will gain in strength from this episode.» This was also the view of Ludek Niedermeyer, deputy governor of the Czech Republic’s central bank. Niedermeyer stressed the need for reliable statistics. He said reliable data was vital for all policymaking and not just to assess how fit countries were for euro entry. «Better data is not important only for the evaluation of the fulfillment of the Maastricht criteria (for euro entry) but generally for making good policy decisions.» Asked specifically about the possible fallout from the Greek case, he said, «I hope that it neither encourages the effort to manipulate things nor means there is some kind of overreaction» that causes policymakers to be excessively strict when checking future euro aspirants’ budget data. Hope for stable currency On the domestic front, financial markets are reflecting the Czech central bank’s thinking more accurately since they scaled back expectations of how fast it would raise interest rates. Niedermeyer also told Reuters he hoped the Czech crown would remain broadly stable. A sharp monthly drop in Czech consumer prices in September, reported on Friday, sparked a decline in short- and medium-term government bond yields as financial markets started betting on a prolonged pause in interest rate tightening. «A couple of months ago it seems the market was anticipating more aggressive action by the central bank… and then there was some correction,» Niedermeyer said. «If there was some correction, this is probably getting the market closer to us,» he added. The Czech central bank made quarter-point hikes to the key two-week repo rate in June and August, taking it to 2.50 percent, half a point above the key European Central Bank rate. Niedermeyer said that the September data, which showed consumer prices fell 0.8 percent from August and climbed 3.0 percent from a year earlier, put inflation on track to meet the central bank’s quarterly forecast. «As the previous figures were slightly higher than expected, the fact that September’s inflation was a little better than expected has brought us into the forecast track.» Niedermeyer declined to speak more specifically on the outlook for monetary policy, adding that interest rate decisions would depend on how economic data panned out. He expressed hopes the Czech crown’s exchange rate would maintain its recent stability. «The fact that the crown was broadly stable in the last quarter was good for our economy. From this respect, I hope it will stay like this,» he said, adding that this did not preclude minor swings. Oil not short-term worry Increases in oil prices, which have hit record highs, have yet to have a dramatic impact on prices in the Czech Republic, he said. «In the short run, this is not the biggest concern for me.» Higher energy costs also had not yet dented the outlook for growth: «I am still optimistic,» Niedermeyer said. The Czech central banker also said the government’s medium-term budget plans appeared to be less ambitious than necessary given the current growth prospects. «The fiscal strategy is not ambitious,» he said. «Among the new member states we are one of those with the least ambitious strategy for budget reduction and at the same time the economy is growing better than expected… Some more ambitious reduction in deficit would be appropriate if the economy keeps growing.» The government in Prague expects to cut its budget deficit marginally to 4.7 percent of gross domestic product next year but not enough to get it below the EU’s 3 percent ceiling.