IMF cheery on world economy but warns against EMU delays
Thursday 24 April 1997
The IMF said none of the big five EU countries would meet the single currency target of a 3 per cent of GDP government deficit.
But it warned that there must be no delay to economic monetary union because the uncertainty was undermining growth.
Yet, in sharp contrast, the European Commission produced its rosiest forecasts for economic and monetary union yesterday, predicting that 13 countries would meet the key deficit criterion to qualify for the launch as growth picked up.
Brushing off renewed accusations that its predictions are massaged, the Commission predicted Germany, France, Portugal, Spain and Austria would meet the deficit ceiling dead-on. All five would hit the 3 per cent figure, which must be attained this year by countries hoping to join at the launch on 1 January 1999.
It was "no coincidence" that the figure should be precisely 3 per cent in so many cases, said Yves Thibault de Silguy, the Economics Commissioner. Attaining that target had been the countries' objective since the Maastricht Treaty. The Commission used the occasion to counter predictions the single currency might be delayed.
The IMF's semi-annual World Economic Outlook was more measured. It said the run-up to EMU was taking its toll on the European economies, because of budget cuts and uncertainty about the shape monetary union would take. "It is critical to get through this period promptly by bringing the project back to term within the agreed time frame," the report said.
It put government deficits in 1997 above the critical 3 per cent of GDP level in France, Germany, Italy, the UK, Spain and Greece, although the report said progress on deficit reduction had been impressive. It added that but for weak growth, all but four EU members would have met the target last year.
The IMF trimmed its 1997 forecasts for growth in Germany and Italy. Nowhere on the Continent does it see a chance of significant falls in unemployment this year, calling for more extensive reforms of employment legislation and benefit systems.
However, it raised its growth forecasts for the US, UK and Canada. Although warning of the risk of a sharp correction on Wall Street, the report said: "There are few signs of the tensions and imbalances that foreshadow significant downturns in the business cycle."
The risk of higher inflation in the UK points to the need for a tougher fiscal policy and an increase in interest rates, the Fund's economists say. They also reckon a further moderate rise in US interest rates will be needed.
On the other hand, the IMF said there might be a need for interest rates on the Continent to fall. Reductions in recent years should have been more rapid in response to the economic downturn.
Despite the differences between the EU and the authoritative IMF figures, Mr de Silguy insisted: "There has been no tinkering or trading." Suspicion has centred particularly on Germany in view of a series of gloomy economic predictions. It has become increasingly clear in recent weeks that the rest of the EU may come under pressure to turn a blind eye if Germany narrowly overshoots the deficit ceiling.
This was all but confirmed yesterday by Commission officials. They insisted differences were simply caused by "rounding up or rounding down of the figures".
Predictions that the Italian deficit would stand at 3.2 per cent this year and an even higher 3.9 per cent next year caused storms of protest in Rome. The Italian government now realises that it is unlikely to be given the same leeway as Germany, on the grounds that its budget-cutting measures are less "sustainable".
Mr de Silguy did not rule out the chance Italy could still make the grade, but he stressed any one-off measures must be supplemented by more lasting cuts.
The Commission figures showed that most countries will continue to over- shoot the Maastricht debt criteria - many seriously. However, it is already clear that the Commission favours more flexibility on the debt criterion, stating only that countries should be moving towards the 60 per cent ceiling.
Its rosy view of the next two years was based on a series of favourable economic assessments, including a prediction EU-wide growth will continue to rise, reaching 2.4 per cent in 1997 and 2.8 per cent in 1998.
Elsewhere in its report, the IMF called on Japan to speed up deregulation of its economy. It trimmed its prediction for Japan's GDP growth this year, although expecting a pick-up in 1998.
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