Governor attacks EU budget pact

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The Independent Online

Mervyn King, the Governor of the Bank of England, launched a withering attack on the revamp of European budget rules yesterday, saying it undermined fiscal discipline.

Mervyn King, the Governor of the Bank of England, launched a withering attack on the revamp of European budget rules yesterday, saying it undermined fiscal discipline.

He echoed criticism by the European Central Bank (ECB) about the reform of the stability and growth pact, saying it made it easier for governments to escape punishment for excessive deficits that could stoke inflation.

"It's clear that my central bank colleagues in Europe are seriously concerned, indeed dismayed is a better word," Mr King told MPs on the Treasury Select Committee.

"The finance ministers have driven a coach and horses through the stability and growth pact. A necessary condition for successful monetary union is collective fiscal discipline. And whatever word you might use to describe those changes to the pact, it isn't discipline."

The strength of his comments surprised the committee's chairman, John McFall, who jokingly asked: "Could you be a bit clearer?" Mr King replied: "I don't think I could be clearer."

Last Sunday, finance ministers ended three years of bitter debate with a deal allowing countries such as France and Germany to run deficits without being punished.

Ministers of the 25-nation bloc agreed that the pact's deficit ceiling of 3 per cent of GDP would be interpreted far more flexibly than in the past.

Yves Mersch, a member of the ECB's governing council, said on Sunday he feared a "fire sale" of stability. "If there is a relaxation on the fiscal side, it will not remain without consequence on the monetary side," he said.

The deal was also been criticised by the UK government for setting a limit of 1 per cent for the medium-term deficit.

Gordon Brown, the Chancellor, told the committee on Tuesday that it would prevent low-debt countries such as the UK from borrowing the money needed to fund major infrastructure investment plans.

He said he had flown to Brussels to ensure that EU countries that were not in the euro were not bound by that rule.

"I was determined that our investment plans should not fall subject to criticism on every occasion from the EU because we were not meeting that narrowly defined minus 1 per cent deficit requirement," he said.

Economists in the City warned that looser fiscal policy could force both market and ECB interest rates up at a time when the economy is still stuck in a low growth environment.

Jonathan Hoffman, the chief European economist at Royal Bank of Scotland, said: "Far from strengthening the fiscal rules, the revamped pact will weaken them. This leaves the markets as the only practical fiscal vigilante."

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