This will keep a lid on euro aggregate demand in the eurozone for a while as budget deficits grow due to falling revenues and increasing transfer payments.
Larger national deficits are needed to sustain output and employment, but also add systemic risk due to their peculiar institutional structure.
By Dave Graham and Anna Willard
BRUSSELS, Nov 3 (Reuters) – Euro zone finance ministers pledged on Monday to stick to European Union budget rules even though economic growth is seen halting next year, in a deal the European Commission hailed as needed policy cooperation.
“This is not the time to let the deficits rip,” said Jean-Claude Juncker, chairman of monthly talks among the finance ministers of the 15-country currency area.
“We don’t want to indulge in an orgy of spending and indebtedness — in essence, mortgaging future generations,” he told a news conference after their Monday talks.
The ministers backed European Commission forecasts that the aggregate budget gap of the euro countries would rise to 1.8 percent of gross domestic product in 2009 from 1.3 percent seen this year and to 2.0 percent in 2010, unless policies change.
They also supported the Commission’s estimate that euro zone economic growth would slow to a mere 0.1 percent next year from 1.2 percent expected in 2008 in the wake of the financial crisis.
EU Economic and Monetary Affairs Commissioner Joaquin Almunia said the widening of the deficit, mainly as a result of a natural fall in revenues and a rise in expenditure, already constituted a significant fiscal stimulus for the euro zone.
> On Mon, Nov 3, 2008 at 11:18 PM, James K. wrote:
> sad, sad.
> ”This is not the time to let the deficits rip,” said Jean-Claude Juncker,
> chairman of monthly talks among the finance ministers of the
> 15-country currency area.
Their loss, our gain, if we play our cards right and accommodate their desire for export driven growth- preferably with their exports going to us.
Might happen if we have the right fiscal package and trade policy to support imports.