Greece and Ireland must take urgent steps this year to cut their spiralling budget deficits in order to protect the eurozone against market perceptions of fiscal indiscipline, finance ministers of the 16-nation area agreed on Friday.
At an informal meeting in Prague, the ministers also said France and Spain should prepare corrective measures next year, with a view to reducing their deficits to less than 3 per cent of gross domestic product by 2012.
In making their recommendations, the ministers were approving proposals made public on March 24 by the European Commission, which is the guardian of the EU’s fiscal rules. Under these proposals, Greece is supposed to reduce its deficit to less than 3 per cent next year, while Ireland will have until 2013.
‘We agreed that it would be very dangerous if we were to let the debt spiral continue unhindered,’ said Jean-Claude Juncker, Luxembourg’s prime minister, who chaired the ministers’ meeting. ‘You cannot fight debt with new debt and deficits with new deficits. Sometimes you have to accept deficits to boost demand, but it certainly can’t be a long-term approach.’
According to economists at Barclays Capital, the eurozone’s collective budget deficit will rise to 5.7 per cent of GDP this year and 7.1 per cent in 2010. The area’s collective public debt is expected to hit 75.7 per cent of GDP this year and 81.4 per cent in 2010. Both forecasts are far in excess of the ceilings of 3 per cent for deficits and 60 per cent for public debt that are supposed to be the upper limit for countries qualifying for eurozone membership.
Ireland’s government is due to present an emergency budget next week to tackle its rapidly deteriorating public finances. Without corrective action the Irish budget deficit is likely to hit 17.8 per cent this year, according to Barclays Capital.
Greece’s deficit will be lower, but the overall stability of its public finances is under scrutiny because of a public debt that, according to Barclays Capital, will soar to 106.5 per cent of GDP next year.
Jean-Claude Trichet, president of the European Central Bank, denied suggestions that eurozone authorities were forcing excessively harsh measures on Ireland, saying the ECB was helping the Irish government by refinancing Irish debt ‘in an unlimited fashion and at fixed rates’. ‘That is a display of considerable solidarity with Ireland at the level of the euro area,’ he said.
The risk that financial markets may begin to perceive the eurozone as an unstable area where fiscal discipline is being thrown to the winds is one of the main reasons why European policymakers have been so reluctant to embrace proposals from the US and other countries for more aggressive deficit spending to fight the rec
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