Euro zone countries could get more time to meet budget targets as part of a “contract” to carry out effective reforms, Jeroen Dijsselbloem, who heads the Eurogroup of finance ministers, said yesterday (6 June).
The European Commission could play a role in checking whether changes such as relaxing labour market rules were actually being done in return for more time to make changes such as cutting government debt, Dijsselbloem said.
“I would be very much in favour of that kind of contract,” he told a European Union seminar.
“It could be an interesting deal between the German side of Europe and the Italian side of Europe,” he added.
Germany has led demands for heavily indebted countries to cut spending while Italy’s Prime Minister Matteo Renzi has sought more emphasis on spurring economic growth to boost government revenue and reduce the relative weight of debt burdens.
Dijsselbloem said such contracts were possible because government finances had already been largely overhauled and economies that were picking up well in the southern euro zone.
“This is the right time to strike this deal, between north and south,” he said.
His spokeswoman said any such contract would only be offered to a country that has already cut its budget deficit to below 3% of GDP.
The debate over striking a new balance between the pace of fiscal consolidation and the need to boost growth is heating up as unemployment remains stubbornly high in some euro zone countries.
Some analysts said France risks missing a 2015 target for completing fiscal measures – a deadline which was already extended by two years – but Dijsselbloem said the country was still “on the correct path and we have to be careful” not to take off the pressure.
But if Italy could make the right reforms and these were credible and upfront, then the euro zone should allow the Italian government to make changes on the fiscal side, he said.
Dijsselbloem, who is also finance minister of The Netherlands, said the pace of reforms has to be stepped up with a “lot of work to be done” on boosting competitiveness.
“My biggest worry now is that we are going to end up in a standstill period, and I think we should push ahead on the reform side,” he said.
He cautioned that Thursday’s actions by the European Central Bank to prod banks into increasing lending to aid growth won’t be enough on their own and that politicians also needed to push ahead with economic reforms.
“We cannot just depend on monetary policy. We still have to do a lot ourselves,” he said. The rate cuts could “buy more time” to complete economic reforms and this time should not be wasted.
He said the banking union under which the ECB will supervise top lenders in the euro zone from November is making good progress but that some rules needed toughening up.
The planned leverage ratio, a measure of capital to a bank’s total assets, has been provisionally set at 3% but this is too low, Dijsselbloem said.
“Contractual arrangements” were designed to be the new instrument in the expanding EU toolbox to try to push economically unsound countries to complete their reform commitments, therefore creating the conditions for future growth in countries dominated by vested interests.
Germany is behind the new proposal to enhance the economic governance of the eurozone, and of the European Union more generally.
With contractual arrangements, countries will be legally forced to implement reforms to gain competitiveness. Until now, they can be told off by the European Commission and “recommended” to carry out reforms, but they have no binding obligation to do so, as long as they do not breach the Growth and Stability Pact.