Brussels, 07/07/2009 (Agence Europe) - Eurogroup discussion mainly turned, on Monday 6 June, to the impact that the crisis would have on member states' fiscal policies. With potential growth cut by half, the 16 Eurogroup members made a cautious evaluation of the current economic situation and of future budgetary consolidation strategies, dismissing any risk of deflation in the eurozone. The question of single eurozone representation within the International Monetary Fund (IMF) has still not been resolved, but can no longer be avoided.
Pending an exit strategy. “It is highly likely that, after the financial crisis, the eurozone will suffer a permanent loss of potential growth”, Jean-Claude Juncker stressed after the meeting. In its quarterly report on the eurozone economy, “the Commission considers the potential output of the eurozone could fall from 2.2% of GDP before the crisis to less than 1% over the period 2009-2010”, he pointed out, saying that account should be taken of this data to define exit strategies and a return to consolidation of public finance. The ministers of the 16 Eurogroup member countries confirmed on Monday evening several general principles around which these exit strategies should articulate. For now, support measures “must be kept in place as long as there is the risk that the economic situation will grown worse”, Mr Juncker said. In his view, “deficits that we have accumulated to date and that we shall accumulate in 2010 should be reduced in stages and, in time, budgetary balance should be restored in order to ensure long-term sustainability of public finances”. Finally, the “resources” chapter of national budgets “must be redirected to ensure decisive productivity increases for long term growth”, he added, also calling for spending to focus on R&D, innovative sectors and public investment. Nonetheless, “the time for applying the exit strategy has not yet come” but “we think that, as soon as there is economic recovery, budgetary consolidation should resume” leading to budgetary balance, Mr Juncker continued. He was supported on this by Joaquín Almunia, European Commissioner for Economic and Financial Affairs.
No risk of deflation. The recent fall in the inflation rate (-0.1% in June) will be temporary and is no cause for concern. “Despite the fall in the general price level in June, it would be absolutely false to deduct from this that the eurozone is on the brink of deflation”, Mr Juncker insisted, saying the “very low if not negative level of inflation can be explained, on one hand, by the impact of the recession we are going through and, on the other, by the impact of base elements” such as oil and food prices that are lower now than they were a year ago. He takes the view that this is a short-lived phenomenon and that a rise in prices is likely. “Inflation will therefore not remain at negative levels during an extended period and there will hence be no risk of deflation”, he underlined, noting that “the fall in prices has a positive short term effect on the income available to households - we should not complain!”
“In a few months' time, we expect to see inflation very close to the price stability objective”, that is a lower level but close to 2%, confirmed Joaquín Almunia. “While at the moment we are not particularly worried about price hikes, over the medium term there are a number of risks we will have to keep a close tab on”, the commissioner said, foreseeing some “inflationary tensions” should oil prices surge again before economic recovery is truly on the way.
Hypothetical “single chair”. While the G20 agreed there should be reform of the IMF governance structures (discussion on this should conclude by spring 2011), the debate on eurozone representation within this body has been rekindled. One of the options on the agenda and powerfully backed by a number of our (Ed: international) partners is to reduce the number of constituencies from 24 to 20”, Mr Juncker explained. “There are a few people, like the commissioner and myself, who have called for a single chair in the eurozone, but this proposal has not received the slightest approbation”, he said, speaking ironically about the fact that “the support list is not sufficiently long” to be taken into account. “The best way to have a clear and strong defence of our common interest as economic and monetary union at the IMF level is to have a single chair representing all euro area members”, Mr Almunia stressed, deploring the prevarication of some. “Everybody agrees that in the long term this is the best solution but for some of the member states it seems that the long term is always very far away”, he said. But, he went on, as things stand at present, “this is the right moment”. (A.B. /transl.jl)