EU Members Must Start Cutting Budget Deficits in 2011
European Union nations should begin cutting budget deficits swollen by emergency government spending by 2011 “at the latest,” according to a draft of a statement to be issued after next week’s summit in Brussels.
“The bold policy response to the economic and financial crisis is now starting to bear fruit,” according to the draft, prepared by the Swedish government, which will chair the Oct. 29-30 meeting. “To anchor expectations and reinforce confidence, it is necessary to prepare a coordinated strategy for exiting” stimulus policies so that budget deficits are cut “beyond the benchmark 0.5 percent” of output, it said.
At least 20 EU governments, including those of Germany and the U.K., will breach the 27-nation bloc’s deficit ceiling of 3 percent of gross domestic product this year and next, the European Commission estimates. The EU’s average budget shortfall is forecast to be twice the limit both years.
The statement would be the first time EU leaders set a deadline to begin budget restraint since the region entered the recession last year. By doing so, the region’s governments are signaling their seriousness about trimming borrowing over time without choking off the nascent recovery next year, said Stephane Deo, chief European economist at UBS in London.
“A lot of people were worried that there would be tightening next year; now we know that that’s not going to happen,” he said. “Yet the current situation is totally unsustainable. You have to do fiscal tightening at some point” and 2011 is an “appropriate” time to do so, he said.
Deficit Spending
Deficit spending can only be successful in stabilizing the economy as long as financial markets and the public view it as temporary, the European Commission, the EU’s Brussels-based executive, said on Oct. 14. The commission forecasts that debt among the 16 nations using the euro will rise to 77.7 percent this year and 83.8 percent in 2010 from 69.3 percent last year.
“The new and main challenge is to get public finances in order as soon as possible after the crisis, and to prepare the social-security system for an aging population,” Alexander Kockerbeck, a senior European analyst at Moody’s Investors Service, said today in an interview.
At the same time, the EU is being careful not to stifle growth. The euro-area economy will shrink 4 percent this year, the commission estimated on Sept. 14. The latest forecast for 2010, issued in May, projects a 0.1 percent contraction.
Central Banks
“Support by governments and central banks should not be withdrawn until the recovery is fully secured,” according to the draft summit statement.
Even 2011 will be more of a turning point on deficits rather than a sudden about face on taxes or spending, Deo said.
“The next debate will be about whether this will cause a double dip in 2011,” he said. “I don’t think so because I don’t think politicians will all of a sudden jump on the breaks and kill the recovery. It’s more about smoothing this out over a number of years, about entering a phase of consolidation.”