The Wall Street Journal

December 18, 2003 11:27 a.m. EST

THE EURO: CASH IN HAND
CURRENCY MATTERS
 See the full statement2 from the shadow ECB council.
 
* * *

 
[The Euro]3
See expanded coverage4 of the euro, as the EU struggles to maintain the Stability Pact that underpins the European currency, and take a look back5 at the decades of effort it has taken to craft Europe's monetary union.

 


 
MAIN PROPOSALS
1. All EU members should reaffirm the need to abide by a fiscal framework that guarantees the long-run sustainability of the public finances 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.

 
3. The focus should be on cyclically adjusted budgets at all times. Breaches of the 3%-of-GDP limit should be permitted when due to cyclical factors.

 
4. Budgetary-surveillance procedures need to be strengthened in each member state.

 
5. The idea of fines should be renounced, save for exceptional cases.

 

Economists Call for Revision
Of Euro-Zone Fiscal Framework

By G. THOMAS SIMS
Staff Reporter of THE WALL STREET JOURNAL

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.


DOW JONES REPRINTS
This copy is for your personal, non-commercial use only. To order presentation-ready copies for distribution to your colleagues, clients or customers, use the Order Reprints tool at the bottom of any article or visit: www.djreprints.com.  • See a sample reprint in PDF format  • Order a reprint of this article now.

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 tom.sims@wsj.com1

URL for this article:
http://online.wsj.com/article/0,,SB10717456545182800,00.html

Hyperlinks in this Article:
(1) mailto:tom.sims@wsj.com
(2) http://online.wsj.com/article/0,,SB10717632167208500,00.html
(3) http://online.wsj.com/page/0,,2_0817,00.html
(4) http://online.wsj.com/page/0,,2_0817,00.html
(5) http://online.wsj.com/article/0,,SB106327734195520000,00.html?mod=special_page_hs_the_euro_2

Updated December 18, 2003 11:27 a.m.

Copyright 2003 Dow Jones & Company, Inc. All Rights Reserved
This copy is for your personal, non-commercial use only. Distribution and use of this material are governed by our Subscriber Agreement and by copyright law. For non-personal use or to order multiple copies, please contact Dow Jones Reprints at 1-800-843-0008 or visit www.djreprints.com.