Eurozone finance ministers to tackle deficits, inflation

BRUSSELS – Greece and Italy face a grilling over budget deficits and growth data at a meeting of eurozone finance ministers this week that will also ponder ways in which national governments could help reduce inflation. Finance ministers from the 12 countries using the euro and European Central Bank President Jean-Claude Trichet meet in Luxembourg today, with counterparts from the other European Union members joining tomorrow. «A lot of countries are currently adopting budgets, but this will be a topic mainly for some countries which have problems in this area,» one source close to the meeting said. «Obviously, it is Italy – the ministers would like to hear how the budgetary process is developing in Italy,» it said. Italy last month raised its budget deficit forecast for this year to 4.8 percent of gross domestic product from 4 percent due to a ruling by the European Court of Justice, the EU’s top court, on tax refunds. But it still plans to cut the gap to 2.8 percent in 2007 to meet its promise to bring the shortfall below the EU ceiling of 3 percent of GDP next year. Greece, whose deadline for cutting the budget gap to below 3 percent is this year, expects to reduce it to 2.6 percent from 4.5 percent in 2005, and then to 2.4 percent in 2007. But Athens has also announced it would revise its GDP data for several years back to include parts of the black economy in a move that is expected to boost its national output by 25 percent. The revision would make the deficit numbers smaller. »The Greek finance minister has sent a letter to his colleagues explaining that, but I am sure the ministers would like some more explanations, as this might give new ideas to all of them,» the source said. The ministers will also discuss German and French progress in bringing their budget deficits lower and tomorrow all 25 EU representatives will look at the budget performance of Britain and the bloc’s biggest sinner in that respect, Hungary. The ministers are likely to back the European Commission’s positive assessment of Britain’s efforts and Hungary’s ambitious reform scheme aimed at bringing the shortfall to 3.2 percent in 2009 from the 10.1 percent expected this year. Price growth The ministers’ inflation discussion planned for today is an analysis of structural aspects of price growth with no links to current events, sources close to the meeting said. But it will come just as the ECB raised interest rates last Thursday for the fifth time since December to stem inflationary pressure and signaled more policy tightening is to follow amid fast credit growth in an expanding eurozone economy. «Member states should take a closer look at their national inflation rates and what the separate components are and see if through domestic policy action they cannot make the work of monetary policy easier,» a second source said. Examples include a surge in housing prices in Spain and rising electricity costs in Austria. Countries can investigate whether such price increases are of a purely speculative nature, the result of policies or a lack of them, wage indexation, administrative price changes, health services liberalization, insufficient competition, the shallowness of a market or constraints on access to capital. «So everybody should take a close look at these issues and not only accuse monetary policy of being at the root of problems, but realize that as finance ministers they have a role to play which they need to take seriously and do something about it at home,» the second source said. The key to slower price growth was in the services sector, a third source said, summing up a European Commission report prepared on the subject for the meeting. «Service markets need reform and need liberalization, and competition enhancement. That’s a very concrete thing one can get from the report, because truly a big part of the problem lies there,» the source said. Annual inflation in September fell to 1.8 percent from 2.3 percent in August and now matches the ECB’s target of «below but close to 2 percent,» but the bank expects price growth to accelerate at year-end and signaled higher rates ahead. Eurozone enlargement The finance ministers will also be briefed by the chairman of the powerful Economic and Financial Committee on how the inflation criterion to enter the eurozone is computed – a topic that raised controversy this year when Lithuania failed in its bid to join the single currency. «The ECB and the Commission have explained how they assess various things, why the alternatives that were outlined are not good alternatives and why there is no need to make any substantive change to any of the rules,» the first source said. «The rules as they are in the treaty were never questioned in the clarification, the (EFC discussions) never looked at the economic rationale underlying alternative proposals.» The eurozone ministers will also touch on merging eurozone seats in institutions, such as the International Monetary Fund, into one, but little progress is seen on that difficult issue. «There are no big breakthroughs expected on the single chair at the IMF for the euro area. We’re just talking about fairly minor steps, regrouping our forces in existing forums to function more efficiently,» the source said.