ECB warns of high cost of money if budget deficits are not cut

Jean-Claude Trichet has urged governments to reinforce their
efforts to obide by the Stability and Growth Pact or face higher
interest rates, which would dampen growth and employment in
Europe.

The President of the European Central Bank (ECB) has repeated
his opposition to weakening the Stability and Growth Pact and
called upon eurozone governments to cut their budgetary spending.
Failing this, he warned that interest rates could rise, which would
have a negative impact on the recovery of the European economy.

“In the absence of such fiscal soundness, price stability can
only be maintained at a higher cost in terms of interest rates, and
therefore lower growth and employement,” said Trichet at a
conference on 12 October 2004. Budgetary discipline was therefore
necessary to achieve sustainable and non-inflationary economic
growth.

The 1997 Stability and Growth Pact requires members of the
eurozone to keep their annual budgetary deficits below three per
cent of GDP. In recent years, however, many countries have
struggled to abide by these rules, and the two biggest euro
economies, France and Germany, have repeatedly failed to stay below
the ceiling. Governments have been blaming the difficult economic
climate for higher budget deficits.

As a result, the Commission has proposed weakening the
definition of the Stability and Growth Pact by including
sustained economic slowdown as an ‘exceptional circumstance’ which
could ease the rules (see EURACTIV 3 September 2004). Eurozone
governments are currently debating these proposals.

The ECB, however, is strongly opposed to relaxing the rules and
making them less transparent. “The Stability and Growth Pact
requires simple and transparent rules in order to facilitate
monitoring; to provide an effective deterrence against unsound
policies,” said Trichet (see also EURACTIV 23 September 2004).

The ECB President also called upon governments to accelerate the
speed of the structural reforms that were agreed in Lisbon in 2000
to boost economic growth in Europe. While recognising that this
would need “a lot of courage and a lot of leadership”, he
emphasised the benefits that would be reaped in the long run.
Furthermore, he pointed out that the growth gap between the US and
the EU was probably due to the absence of structural reforms.

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