European governments should not allow extra discretionary spending to add to the budget slippage which is already being seen as growth slows in the region, EU Monetary Affairs Commissioner Pedro Solbes has said.
He said EU policymakers faced testing times with short-term economic prospects worsening following the September 11th attacks, and he repeated a forecast that the euro-zone economy would grow by around 1.5 per cent in 2001.
While the economic policies of the 1990s meant euro-zone monetary and fiscal policy had more room for manoeuvre in the past, budgets should not become too expansionary, he said.
Fiscal slippage is likely as tax revenues are depressed and spending on social security rises. Mr Solbes said states should not try to offer slowing economies more support than was already being provided by these so-called automatic stabilisers.
"A discretionary fiscal expansion is not considered desirable because of two reasons," he said.
"First, past experience tells us that discretionary fiscal policy is not an efficient stabilisation tool. Second, it could even be counterproductive if it were to jeopardise the soundness of public finances which has been regained during a decade of efforts."
Mr Solbes said that while inflation may still be above the European Central Bank's 2 per cent tolerance threshold, price pressures were abating.
"The fall in oil prices and the moderate strengthening of the euro exchange rate have, together with lower demand growth, considerably reduced inflation pressures," he said.
Ageing populations and the added burden this would place on government budgets meant governments had to act now to ensure public finances were on a sound footing, and to promote employment and productivity.
Mr Solbes said joblessness was unacceptably high and that it was important to press on with structural reforms and to increase the growth potential of the European economy.
On a brighter note, he said there were no major imbalances in the public or private sector in the euro zone, and that the region had a stronger economy than was the case 10 years ago.
Preparations for monetary union had transformed the EU economy from one which was characterised by high inflation and budget deficits to one based on a strong commitment to low inflation and budget discipline, Mr Solbes said.
Meanwhile, the European Union will spend €1.9 billion less than previously forecast in its 2002 budget because of savings on agriculture, Budget Commissioner Ms Michaele Schreyer said yesterday.
Ms Schreyer, speaking after the Commission approved the amended budget, said estimates of farm spending had been revised down from the May draft.
There was no longer a need for a €1 billion reserve to cover financial risks from the mad-cow and foot-and-mouth disease crises.
She said the 2001 budget would yield a €1 billion surplus, to be carried forward as revenue in 2002, reducing the amount member-states had to pay to fund next year's budget.
