December 18, 2003 11:27 a.m. EST
Economists Call for Revision
By G. THOMAS SIMS
FRANKFURT -- A group of seven respected economists from universities and financial institutions throughout Europe on Thursday called for a revision of the euro zone's fiscal framework after the rules were suspended last month.
The economists said that euro-zone countries should be allowed to let their budget deficits exceed the current limit of 3% of gross domestic product during economic slumps "to avoid excessive adjustment costs in the face of negative shocks."
In addition, they call for renouncing the imposition of fines, except in unusual cases. They also said a new body should be created to act as a watchdog for national budgets. The independent body would report to the European Parliament and work with the European Commission.
David Walton, chief European economist for Goldman Sachs, who helped spearhead the issue, sees the euro-zone Stability Pact's recent failure as a window of opportunity to correct the flaws of the old framework. "Europe needs a reform of the Stability Pact that provides the euro zone with a durable fiscal framework built on solid economic foundations," he said in a statement Thursday.
The seven economists signing on to the proposal are all members of a group of European Central Bank observers, known as the "shadow ECB council" and sponsored by the German business paper Handelsblatt in cooperation with The Wall Street Journal.
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The other six economists are: Paul de Grauwe, Professor of International Economics, University of Leuven; Francesco Giavazzi, Professor of Economics, Bocconi University; Martin Huefner, Chief Economist, HypoVereinsbank; John Llewellyn, Chief Economist, Lehman Brothers; Patrick Mange, Head of Research, BNP Paribas Asset Management; and Charles Wyplosz, Professor of Economics, Graduate Institute of International Studies, Geneva.
The euro zone's fiscal rules were suspended last month after Germany and France -- which had both been exceeding the 3% limit -- were able to escape a commission proposal to make additional budget cuts next year.
A number of governments have since called for changes to the pact, and the commission is looking at its own proposed changes. The European Central Bank, which relies on a predictable fiscal policy to set monetary policy, has rejected any change to the pact.
Here is a summary of the five main proposals as presented by the economists in a statement Thursday:
1. All members of the European Union should reaffirm the need to abide by a fiscal framework that guarantees the long-run sustainability of the public finances within the euro zone while allowing fiscal policy to help smooth fluctuations in the business cycle.
2. There needs to be a clear focus on what governments need to do to achieve debt sustainability over the medium term. The appropriate budgetary position will vary from country to country.
3. To avoid excessive adjustment costs in the face of negative shocks, and insufficient adjustment in the face of positive shocks, the focus should be on cyclically adjusted budgets at all times. Breaches of the 3%-of-GDP limit should be permitted when these are due to cyclical factors.
4. The surveillance procedures need to be strengthened in each member state. Serious consideration should be given to the creation of independent watchdog institutions that report to the European Parliament and work with the European Commission to evaluate budgetary policies in the light of economic developments and agreed medium-term debt targets.
5. The idea of fines should be renounced, save for exceptional cases. Ultimately, the Stability Pact has to be a disciplining device working though peer pressure, not sanctions. The ECB should exclude bonds from being used as collateral from states not complying with the framework.
Write to G. Thomas Sims at email@example.com
Updated December 18, 2003 11:27 a.m.
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