Brussels: Some euro zone countries which are meant to cut budget deficits below 3% of GDP in 2013 may need more time and there is room for a more expansionary policy from the European Central Bank, IMF deputy managing director Nemat Shafik said.
“Overall, fiscal adjustment plans for this year are broadly appropriate in Europe,” Shafik told a conference in Brussels on Thursday.
“In a few euro area countries, however, the nominal fiscal targets for 2013 agreed before the current slowdown in growth may prove too pro-cyclical and may need to be adjusted or at least expressed in structural terms,” she said.
“The Stability and Growth Pact’s excessive deficit procedure does allow for some flexibility in deciding how fast to bring deficits below 3% of GDP. Should economic conditions worsen, this flexibility should be used to revise deadlines for meeting the targets.”
Shafik said the deficit goals should be expressed in structural terms, which exclude one-off revenues and expenditure as well as the effects of the economic cycle.
Monetary policy played a crucial role in supporting growth in the short term, she added.
“With price pressures expected to decline, this means the ECB could consider further expansionary measures to prevent aggregate inflation slipping far below the target of keeping inflation at or below 2%,” she said.
Year-on-year inflation in May fell to 2.4% in the euro zone from 2.6% in April. The ECB wants to keep inflation below, but close to 2% and many economists expect price growth will slow further from May because the euro zone economy is in recession.
Shafik also supported the ECB’s and euro zone ideas of creating a bank resolution fund, a pan-euro zone bank deposit guarantee scheme and euro zone financial supervision.
“To ensure that banks which receive pan-European support are properly restructured and supervised, these banks could over time be made subject to centralised regulation and supervision, through a joint bank resolution authority with a common backstop and a single deposit insurance fund,” she said.
“The introduction of a common backstop for a pan-European financial system would entail some fiscal risk-sharing, but restoring stability and confidence will require additional pooling of sovereignty,” Shafik said.
“Developing a pan-European financial stability framework would decouple banks from sovereigns and reduce deleveraging pressures, thereby facilitating the availability of credit and investment.”