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03 December 2003

EZA Report 572: Euro-Economy




Ecofin fudge on Stability & Growth Pact paves way for further difficulties for future euro area entrant
Ecofin’s decision on Nov. 25 to let France and Germany off the hook and suspend Excessive Deficit Procedures shows EMU fiscal rules to be a casualty of the tension between national (fiscal) priorities and euro area wide rules. Since fiscal adjustment is the main shock absorber in a monetary union, this tension will not disappear even with better fiscal rules. But, until euro area economies are more closely converged, including debt levels, welfare states and trend growth rates, deficit levels will vary widely. We retain our view that a flexible interpretation of the SGP’s 3% budget deficit ceiling is a more likely out-turn than completely abandoning it, given potential new accession country members high budget deficits (EZA rpt 568 /03Nov13). Laying bare the difficulties in the euro area policy regime reduces further the prospect of euro membership for the UK, Sweden and Denmark. With a softer version of the SGP in play, and the 3% budget deficit rule less binding, the convergence trades with central and eastern Europe of recent years look less secure and more volatile sovereign spreads and capital flows within the euro area and capital flows are likely.

SummaryAsset Conclusions: A softer version of the SGP and EDP will mean more volatile spreads between countries within EMU, and potential new members

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© Graham Bishop

Documents associated with this article

EZA572.pdf


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