EU members told to coordinate tax, spending policies to avoid an euro crisis |
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Wed, 10 Aug 2005 01:05
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LONDON: The European Union governments should immediately agree to coordinate their tax and spending policies to avoid a crisis of the euro, says a report by a noted economist.
In an article, "The Euro In Crisis" published in the European Policy Forum, Tim Congdon, chief economist at Lombard Street Research and once an adviser to chancellors, says the euro's governing Stability and Growth Pact should be tightened to prevent prices soaring -- because Europe's leaders show "no sign of recognising the logic which justifies the case for fiscal prudence".
Unless this is done, the future of the euro could be in jeopardy, he warns, as Europe is not on course to centralise fiscal decision-making, a precondition for monetary union success, until 20 or 30 years from now.
He sounds pessimistic in saying, "Fiscal centralisation within a fully-fledged political union is a precondition for success in a monetary union. But the necessary degree of fiscal centralisation will not occur in Europe for the next 20-30 years, and wonders whether the eurozone can survive that long.
| "Unless the eurozone's leaders are able within the next few years to enforce genuine fiscal centralisation across the 12 member-states, a reasonable conjecture is that the UK fiscal arrangements will look increasingly satisfactory by comparison."
There must be control on public spending by the member-states, otherwise inflation will reach unmanageable levels, he adds, suggesting then that the European Central Bank should reduce the maximum budget deficit allowed under the Stability and Growth Pact from 3 per cent to 2 per cent of GDP, because the eurozone's underlying GDP growth has fallen from 3 per cent to to 1.5 per cent a year.
Inflation at low levels is essential, he agrees, for the continued popularity of the euro, but says "an economically unsustainable course of action must also -- in the end -- be politically dangerous and unacceptable". France and Germany have found it difficult to maintain the maximum budget deficit at 3 per cent.
Congdon praises the European Central Bank for its "superb job" in keeping the eurozone inflation at 2 per cent over the last six years.
He says that deliberate increases in budget deficits are likely either to raise debt interest costs by more than the increase in the budget deficit, or to increase inflation.
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