By Steve Ball
London, March 12 (BridgeNews) - The way that EU countries measure each other's fiscal policies has to be changed to take greater account of long-term sustainability, U.K. officials urged. Speaking as EU finance ministers gathered in Brussels for their Ecofin meeting, the U.K. officials said the EU had to focus on public finance balances that were adjusted for the state of the economic cycle. Beyond that, the EU then had to move to take account of the sustainability of public finances in the face of long-term demographic pressures.
* * * The comments appear part of a concerted attempt by the U.K. to reform the EU's so-called Broad Economic Policy Guidelines, the annual agreement between EU finance ministers about how they will co-ordinate fiscal policy in the coming year.
The aim would be, not to amend the Stability and Growth Pact, but to improve the annual Broad Economic Policy Guidelines. U.K. officials were adamantly clear that the intention is not to loosen fiscal rules, but to tighten them.
Little progress is expected soon, but the issue will be aired at the EU economic reform summit in Stockholm later this month, and at the informal Ecofin in April.
At the last Ecofin meeting in February the U.K. was publicly censured by the other EU countries for projecting that its public finances will move into a sustained deficit of around 1% of GDP in two years time. The U.K. was infuriated by the move, and the U.K. Treasury now seems determined to change the terms of the debate.
One official said that the current system was questionable, since Italy was allowed to present plans that were based on a sustained growth rate of 3%, even though the Italian economic miracle while hoped for had yet to be proven. At the same time the U.K. was censured for showing deficits on a forecast assumed a trend growth rate of 2.25%, the long-term historic average. U.K. officials said that if U.K. growth turned out higher than the trend rate, the projected deficits disappeared.
Instead, the U.K. wants the EU to set its benchmarks based on cyclically adjusted budget figures. This would have the added advantage that it would for the first time set a standard to measure the appropriateness of the budget surplus of any EU countries, the U.K. officials said.
It would then be possible to have a more rational debate over whether countries like Ireland were running the appropriate level of budget surplus.
The officials recognized that it would not be a smooth or easy process.
There would inevitably be difficulties in agreeing how to measure the trend growth rate, and how to make allowances for breaks in underlying economic performance. There was also a technical issue about what method to use to adjust for the economic cycle.
But despite the practical difficulties, the aim is to get the EU to look at cyclically adjusted numbers. U.K. officials said it was better to have imprecise estimates of the right variable rather than precise estimates of the wrong variable.
Once this has been achieved, the EU could then look at the intergenerational aspects of public financing, including public sector investment and important questions around demographics, aging and pensions policy. End
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