WASHINGTON, Nov 12: Europe should be more flexible in its fiscal policy to help stimulate economic growth there at a time when the global economy is slowing, the International Monetary Fund’s Stanley Fischer said.
In an interview published in the latest edition of Central Banking magazine, the former IMF second-in-command said it was crucial that Europe bolster growth prospects and that he was puzzled by a lack of action there.
The US slowdown is obviously much more serious now, and we are not getting any growth out of Japan, so European policy is even more crucial, Fischer, now a special adviser to IMF Managing Director Horst Koehler, said in the interview.
It is somewhat puzzling to understand the reluctance in the European Union to take expansionary action at a time when there are so many forces depressing demand, he said.
Fischer said there was more room for the European Central Bank to cut rates, although his comments came before the central bank cut interest rates by a half a percentage point last week.
But it was on fiscal policy that Fischer was especially critical, saying that Europe had not done enough to improve its fiscal position during the boom years of 1998-2000.
Fischer also took issue with the Stability and Growth Pact, which economists at the IMF believe is being interpreted too literally by many European countries.
The Stability and Growth pact has been very useful in providing a political framework in which serious deficit reduction could take place, and it still is useful, Fischer said.
But there is a process where, with the consent of Brussels, some leeway is possible.
Under the Stability and Growth Pact, European economies must adhere to a nominal fiscal deficit target. The IMF believes that countries should focus less on short-term targets, concentrating instead on the medium-term goal of balance or fiscal surplus.
The IMF would like European countries to ignore those short-term nominal deficit targets, which it believes exacerbates slowdowns by causing spending to contract with shrinking tax revenues.
Instead, European economies could allow tax revenues to shrink but maintain their spending plans — something that would help prop up economic activity.
Fischer’s was just the latest in a long line of IMF criticism of Europe on fiscal policy in recent weeks.
Last week, the IMF forecast economic growth in the 12-nation euro zone of 1.7 per cent this year and 1.6 per cent next year.
In the wake of the Sept. 11, attacks on the United States, the projection for 2002 was much lower than the IMF’s earlier 2.2 per cent estimate.
Under the method used by Eurostat, the IMF said, growth would be 1.6 per cent this year and 1.5 per cent for 2002.
The latest IMF estimates will likely be revised even lower in the weeks ahead as the lender prepares to revise its World Economic Outlook publication.
Last week the IMF’s Koehler pressed for Europe to change its fiscal policy in an interview with Der Spiegel.
The pact for Stability and Growth also offers flexibility. It is important to use this, he said.—Reuters