EU at “critical point” on future of euro area, expert says
The warning came from US Treasury Secretary Janet Yellen, who questioned whether the bloc should reimpose the rigid eurozone spending and deficit rules. Aligning himself with the southern EU states, already in conflict with the northern and more frugal countries of the bloc, the US finance chief said: “It is important to ask whether or not [the rules] create the flexibility that EU countries need to be able to cope with cyclical developments.
“We have been in a very low interest rate environment.
“I expect we will stay there, although that is yet to be determined, but is a 60% debt-to-GDP ratio the right kind of measure?
“We have done too little to address the budget problem.
“Monetary policy got to a position where there was little it could do and we needed fiscal stimulus.
“We ended up with a very long and slow recovery.
“We must not withdraw budget support too quickly.”
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The issue is already dividing the bloc, prompting Commissioner Paolo Gentiloni to warn that the differences between states in the north and south will be exacerbated.
It was a risk worth taking to reach an agreement, he said.
He said: “The risk of differences is there – you could even argue that the risk is greater if you do not open the debate on the rules.”
And the debate is already underway, as well as the preparation of both camps on how best to set foot on the issue.
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Last month, Austrian Chancellor Sebastian Kurz sought to assemble a team of rebel EU countries that would prevent a loosening of the bloc’s fiscal rules when they are reviewed later this year and in 2022, calling for more focus on reduction of public debt.
In a letter to EU counterparts, Austrian Finance Minister Gernot Bluemel said the rules had been key to reducing debt-to-GDP ratios across the bloc after the sovereign debt crisis.
Austria is part of a group of EU countries often considered frugal, along with Sweden, Denmark and Finland, the Netherlands, Germany, the Baltic States, Slovakia and the Czech Republic.
Mr Bluemel wrote in the letter: “A key lesson after the financial crisis has been the need to reduce high debt ratios and increase fiscal sustainability in order to prepare for unforeseen future events.
“The Commission will propose a review of the economic governance framework in the coming months.”
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He added that some ideas for reforming the EU’s Stability and Growth Pact were presented at a ministerial meeting last month.
He continued: “I am somewhat concerned about some contributions that challenge a rules-based framework or dilute the value of sustainability.
“Our common goal must be a reduction in debt-to-GDP ratios in the medium and long term.”
Some senior EU officials have said the rules, which have already been revised three times and are becoming increasingly complex, should be simplified and focus on criteria that finance ministers can directly monitor, such as public spending and debt.
But others said the rules should promote investment, which is the key to growth, and thus possibly exclude it from calculations of budget deficits, which can now not exceed 3% of GDP.
Some senior officials have also said that, rather than targeting their debt-to-GDP ratios, governments should focus on debt servicing costs.
They argued that with interest rates likely to stay very low for a long time, what a country spends on debt service is a better measure of debt sustainability.
But Mr Bluemel cautioned against this view.
He wrote: “Even though the current funding environment is undoubtedly favorable and the interest rate-growth differential was negative in the last few years before the crisis, there is no guarantee that this will always be the case.
“We have all witnessed the economic, social and political costs of fluctuations in market sentiment, when policies and developments were no longer seen as sustainable.”