Can relaxed budget rules help Central European economies?

04-09-2004

The European Commission says it wants member states to have more flexibility in framing their budgets. It's proposing changes to what's known as the Growth and Stability Pact - set up to defend the euro's stability. But the growth part of the pact seems to have got lost along the way. Western Europe lags far behind the US and many Asian countries in economic growth. But new EU members from east and central Europe have high growth figures.

We asked Daniel Thorniley from The Economist corporate network in Vienna, what effect greater flexibility may have on east and central European economies:

It has taken about five years for the European Commission to realise that their fundamental economic policy has been going in the wrong direction. It's been a disaster for Europe and it has exacerbated a weak economic performance. Obviously Central European administrations now see that the Growth and Stability Pact is a busted flush. But we will be in a period of shadow boxing for maybe one or two years now, whether Central Europeans pretend to bring down their budget deficits, which they need to do. The budget deficit is the biggest risk for Eastern and Central Europe. Inflation is not a big problem, productivity is good, and investment is quite good too.

Well, is there a danger then if we get weaker signals from Brussels about budget discipline, that we could see some of these economies over spend to combat unemployment, when in fact they should be doing some tough restructuring?

That's certainly a risk but the question is to what extend you want them to do that tough restructuring. Western Europe has been a low-growth, low-investment part of the world for five years now. Do we want to pass that on to central Europe as well, when the have good growth and good investment trends at the moment?

How much should it be a matter of concern that any loosening of the Stability Pact could be seen as the EU serving the interests of the big members? Certainly France and Germany are seen as having the biggest problems, so is this a case also to a certain extent that EU policy is bent to their interests?

To some extent yes but the Growth and Stability Pact just proved to be completely non-flexible. Remember that it has damaged the Netherlands, Italy, and Portugal, as well as France and Germany. So, it's the big economies that are having a problem. I don't think it is power politics. It just so happens that the big economies ought to be the more important ones and we shouldn't worry too much about inflation in Finland, Ireland, Portugal, and Spain. The focus is being wrong. The ECB has been worrying too much about the smaller economies and has not worried enough about the engines of growth.

And if we see a loosening of the roles and bigger budget deficits, is it possible to say at this point how quickly this could have an impact on EU economy, when growth rates would finally start to improve?

It will take time; one to two years to pick up a start. Economies need time to get rid of their spare capacity, to pick up on investment trends, to get confidence and the biggest problem of all is consumer confidence. Sure, we need the economic and fiscal policies to be in the right direction but it is a sense of confidence. But the biggest problem in Western Europe is that people save too much and don't spend.

04-09-2004

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