[Pace Prodi, the Stability Pact is now known among cogniscenti as the Stupid Pact]
Financial Times; Oct 30, 2002
EUROPE: IMF urges 'big three' in eurozone to tighten fiscal policy
By Alan Beattie in Washington
The International Monetary Fund has weighed into the debate over the eurozone's stability and growth pact (SGP), arguing that the big three countries - Germany, France and Italy - should heed its message and make a concerted effort to tighten fiscal policy.
The IMF also cut its forecast for economic growth in the eurozone and said that the European Central Bank should lean towards lowering interest rates - a recommendation rejected by a representative of the eurozone authorities at the IMF.
In its annual assessment of the eurozone economy, released yesterday, the IMF admitted that the pact was "not beyond improvement", and welcomed the new focus on correcting for the economic cycle when targeting fiscal balance.
But it said: "The core of the recent difficulties is not the SGP, but the difficulties the three largest countries are having in implementing fiscal consolidation."
It said that Germany, France and Italy should tighten fiscal policy by 0.5 per cent of gross domestic product per year over the next several years until their budgets were in balance.
"The SGP is a sound framework but it has a credibility problem," said Michael Deppler, director of the IMF department which covers the eurozone.
A concerted effort by the big three would allow the ECB to plan for lower interest rates, and would prevent the smaller countries backsliding on their own efforts to tighten fiscal policy, he said.
The IMF's criticism follows a fierce controversy within the eurozone about the stability and growth pact. Mr Deppler said he backed the European Commission view that the pact was necessary to enforce fiscal discipline but he said that the focus on setting nominal targets for budgets to be close to balance by 2004 was misplaced.
In a gloomy assessment of the eurozone economy, the IMF cut its forecast for growth this year to 0.75 per cent from its 0.9 per cent projection in September, and to 2 per cent next year from its September forecast of 2.3 per cent.
There remained significant downside risks to the forecast, with indebted companies and wary consumers possibly delaying the recovery, the IMF said. The ECB should adopt a loosening bias, but the bulk of the responsibility for boosting growth lay on structural reform in the eurozone economy, it said.
In a statement released with the report, Harilaos Vittas, the Greek executive director on the IMF's governing board, rejected the advice for the ECB to lean towards reducing interest rates.