EU at ‘crunch point’ over future of the Eurozone says expert
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The warning came from the US Treasury Secretary Janet Yellen, who questioned whether the bloc should reimpose the eurozone’s rigid spending and deficit rules. Aligning with southern EU states, already clashing with northern and more frugal countries in the bloc, the US finance chief said: “It’s important to think about whether or not [the rules] create the flexibility that countries in the EU need in order to be able to address cyclical developments.
“We have been in a very low interest-rate environment.
“I expect we will remain there, although that’s to be determined, but is 60 percent debt-to-GDP ratio the right kind of metric?
“We did too little to address on the fiscal side.
“Monetary policy got to a position where there wasn’t much more it could do, and we needed some fiscal stimulus.
“We ended up with a very long, slow recovery.
“We should not pull back fiscal support too quickly.”
The issue is already splitting the bloc, prompting Commissioner Paolo Gentiloni to warn differences between northern and southern states will be exacerbated.
This was a risk worth taking in order to reach an agreement, he claimed.
He said: “The risk of differences is there — you could even argue the risk is stronger if you don’t open the debate on the rules.”
And the debate is already ongoing, along with preparation from both camps on how to best put their feet down on the issue.
Last month, Austrian Chancellor Sebastian Kurz sought to build a team of EU rebel countries that would prevent a softening of the bloc’s budget rules when they come under review later this year and in 2022, calling for a stronger focus on reducing public debt.
In a letter to EU counterparts, Austrian Finance Minister Gernot Bluemel said the rules had been central to reducing debt-to-GDP ratios across the bloc after the sovereign debt crisis.
Austria is among a group of EU countries often seen as frugal, along with Sweden, Denmark and Finland, the Netherlands, Germany, the Baltics, Slovakia and the Czech Republic.
Mr Bluemel wrote in the letter: “A key lesson after the financial crisis was the need to reduce high debt ratios and increase fiscal sustainability in order to prepare for unforeseen future events.
“The Commission will come up with a review of the economic governance framework in the coming months.”
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He added some ideas for reforms of the EU’s Stability and Growth Pact were presented at a ministerial meeting last month.
He continued: “I am somewhat concerned about some contributions questioning a rules-based framework or diluting the value of sustainability.
“Our common objective must be a reduction of debt to GDP ratios over the medium- and long term.”
Some senior EU officials said the rules, which have already been revised three times and become increasingly complex, should be simplified and focused on criteria that finance ministers can directly control, like public spending and debt.
But others said the rules should promote investment, which is key for growth, and therefore possibly exclude it from calculations of budget deficits, which now cannot be higher than 3 percent of GDP.
Some senior officials also said, rather than targeting their debt-to-GDP ratios, governments should focus on debt servicing costs.
They argued because interest rates are likely to stay very low for a long time, what a country spends on debt servicing is a better measure of debt sustainability.
But Mr Bluemel cautioned against that view.
He wrote: “Even though the current financing environment is undoubtedly favourable and the interest rate-growth differential was negative over the past years before the crisis, there is no guarantee that this will always be the case.
“We all have witnessed the economic, social and political costs of swings in market sentiment, when policies and developments were deemed no longer sustainable.”
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