The Wall Street Journal

September 18, 2003 5:05 p.m. EDT


EU Should Ease Stance
On Deficits, IMF Says


DUBAI, United Arab Emirates -- The European Union's controversial budget-discipline rules need to be interpreted more flexibly as EU countries try to stimulate lagging economies, an International Monetary Fund official said.

The IMF's chief economist, Kenneth Rogoff, stepping gingerly into a bitter dispute pitting the EU against France and Germany, said Thursday that while the union's budget-deficit limit has prevented economic problems in the past, "it doesn't give enough flexibility in the downturns."

As "much as I applaud the pact's past success," Mr. Rogoff said, referring to the EU's Growth and Stability Pact, "its interpretation and implementation need to be modified going forward if Europe is to conquer the problems of the present century as well as it dealt with the problems of the past one."

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Mr. Rogoff's comments come as France and Germany argue they shouldn't be fined by the EU for violating the pact's requirement that countries limit budget deficits to 3% of gross domestic product. The two large countries say that stimulus measures such as tax cuts and greater public spending are more important now to boost their economies, a position that has angered smaller countries with balanced budgets. The Netherlands has threatened to sue the European Commission, the EU's executive arm, if it fails to enforce the deficit-limit rule.

The IMF official acknowledged the commission is in a difficult position. "When one of your very large states runs deficits," Mr. Rogoff said, "it is hard to bring much moral suasion to bear." And he stressed that without the budget-discipline pact over the past decade, "we would have seen one or two [EU members] knocking on the IMF door," referring to emergency support for faltering economies.

Without naming any nations, he added that "countries, especially the large core countries, need stronger incentives to save in good times so as to be ready for the downturns." The IMF and other international organizations have noted in the past that France and Germany failed to sufficiently rein in spending or implement pension reforms during the boom times in the 1990s.

Mr. Rogoff, speaking at a news conference before annual meetings of the IMF and World Bank, said an overly strong euro could hinder Europe's recovery and the IMF would welcome a new cut in interest rates by the European Central Bank.

"Right now I would not quibble with the ECB's stance," Mr. Rogoff said, "but you would not hear any complaint from this quarter if they were to cut rates even now with the euro where it is." The ECB's key interest rate has been at 2% since a half-point cut in June.

Comparing Europe's fragile economy with a more bullish outlook for the U.S., he said that "for the moment, Europeans who want to see an economic recovery will have to watch it on TV."

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Updated September 18, 2003 5:05 p.m.

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