Brussels, 14/02/2013 (Agence Europe) - The European Commission is convinced that the culture of budget stability that has materialised in the form of correcting public finances must continue and that it does not stand in the way of medium-term growth, announcing as much at the same time as France announced that it will not be able to meet its public deficit target of below 3% of GDP in 2013 (see separate article and EUROPE 10784).
“There is a convincing economic and political case for maintaining a steady consolidation pace throughout the ups and downs of the cycle.(...) The stability culture embodied in Europe's reinforced economic governance does not stand in the way of sound, long-term growth. To the contrary: Carefully calibrated fiscal consolidation in a credible medium-term horizon creates the conditions for sustainable growth for years to come”, argued Euro Commissioner Olli Rehn in a letter to EU finance ministers and the head of the ECB, which he published on his website on Wednesday 13 February.
Continuing the budget consolidation undertaken since the financial crisis is a way of boosting investor confidence in countries going through a difficult patch, explained the Commissioner. He said that this makes it possible to overcome the negative impact of austerity measures on growth at national level, citing the example of the eurozone that has cut its average public deficit from 6% in 2009 and 2010 to just over 3% in 2012, with further improvements expected in 2013.
“Each country's consolidation effort is specified in so-called structural terms, which means removing the effects of the business cycle and on-off measures on the budget. If growth deteriorates unexpectedly, a country may receive extra time to correct its excessive deficit, provided it has delivered the agreed structural fiscal effort”, said Rehn, adding that “such decisions were taken last year for Spain, Portugal and Greece”.
Fiscal multipliers. Rehn commented on research by the IMF and others, recognising an under-estimate of the negative impact of austerity policies on growth. “Both the Commission and the IMF have found that the biggest growth forecast errors occurred in 2010, when most countries were implementing temporary fiscal stimulus measures after the huge fall in activity in 2009, rather than consolidation measures”. He added that “the IMF is not calling for a reversal of the fiscal policy course followed during the crisis (...) and recent studies on fiscal multipliers are of particularly limited use when it comes to the specific case of Greece. Indeed in a recent opinion piece published in the Greek press, IMF Chief Economist Olivier Blanchard stated that to associate Greece's underperformance with programme design 'represents a fundamental misreading of the historical record and of the IMF's research on fiscal muiltipliers'”. (MB/transl.fl)