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IMF: Brussels needs more power over euro nations' budgets
06-21-2010, 06:44 PM,
#1
IMF: Brussels needs more power over euro nations' budgets
Quote:The IMF today accused eurozone governments of relying on "crisis management" to get through their troubles and warned they needed to move quickly to centralise economic decision making or risk a double-dip recession.

A series of reforms allowing the eurozone to impose stricter discipline on government budgets by increasing power at the centre must be agreed along with plans to tackle the structural weaknesses in the European economic system, including labour reforms, it said.

Without taking action, and moving quickly to harmonise monetary and fiscal policies, growth will stall and public finances will worsen again, possibly dragging down the world economy.

The warning came as European finance ministers sought to calm nervous markets by nailing down details of a massive financial safety net for the eurozone. At the same time Germany revealed budget cuts designed to set an example for its partners in the bloc.

The coalition of the German chancellor, Angela Merkel, agreed to pursue savings of €11bn (£9bn) next year, part of an €80bn package of cuts by 2014. Among the measures agreed were a plan to cut €30bn from the welfare budget, including a reduction in subsidies to parents who stay at home. Up to 15,000 government jobs are at risk.

Stock markets remained weak as the eurozone's 16 members struggled to patch an agreement and Hungary's government rushed to deny statements over the weekend that it faced a Greek-style debt crisis. The postponement of talks between Merkel and France's president, Nicolas Sarkozy, did little to reassure investors that the euro's largest economies were taking a unified stance on the crisis.

The FTSE 100 dropped 1% to 5,069 points, while the Paris CAC index and Germany's Dax also fell.

In a series of recommendations, the IMF argued that stronger eurozone countries needed to marry a tighter fiscal policy with reforms to improve growth.

Without naming France and Germany, the Washington-based IMF said the burden of driving growth would fall on the shoulders of the strongest members of the euroIt said labour market reforms coupled with a more open policy on foreign investment and liberal competition rules should be allowed to boost growth.

"Robust global demand and the weaker euro ... are helping the export sector, but rigidities, especially in labour and financial markets in some countries, are limiting the necessary restructuring in the aftermath of the global crisis and hampering the efficient reallocation of labour and capital," it said in the concluding statement of its "Mission on Euro-Area Policies".

The IMF boss, the former French foreign secretary Dominique Strauss-Kahn, is likely to face stiff resistance from many EU nations to calls for greater central power and accelerated structural reforms. Countries such as Spain and Italy are unlikely to sanction further powers to a eurozone committee that will in effect be run by France and Germany. Also, unions will attack the call for reforms as a repeat of the right-wing, anti-labour, anti-welfare policies of previous IMF administrations.

Ministers from the 16 nations that share the euro are debating arrangements to allow a Special Purpose Vehicle to raise up to €440bn to lend to eurozone nations that run into Greek-style payments problems. "I am confident we will have an agreement today on the SPV," European economic and monetary affairs commissioner, Olli Rehn said y.

He said ministers would also discuss "the fiscal exit strategy (from economic stimulus measures) because it is evident that many countries need to accelerate fiscal consolidation".

Hungary's new centre-right rulers, who spooked markets last week with loose talk of the country facing a Greek-style crisis, tried to reassure investors yesterday by pledging to stick to deficit-cutting targets their predecessors agreed with the IMF. Jean-Claude Juncker, chairman of the eurozone finance ministers, told reporters: "I do not see any problem at all with Hungary. I only see the problem that politicians from Hungary talk too much."

http://www.guardian.co.uk/business/2010/jun/07/imf-warns-eu-ministers
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