ECB cautions on budget deficits

Euro zone governments run the risk of breaching budget deficits laid down in the Maastricht Treaty unless they implement economic…

Euro zone governments run the risk of breaching budget deficits laid down in the Maastricht Treaty unless they implement economic reforms, the European Central Bank has warned in its first annual report.

The ECB, in Frankfurt, also cautions that various euro zone countries "could easily approach or even exceed" the 3 per cent limit for budget deficits as a proportion of gross domestic product.

Most euro zone states, it warns, are still far from attaining the target set out in the Stability and Growth Pact of achieving budgetary positions "close to balance or in surplus" over the medium term.

But it notes that Ireland, Luxembourg and Finland had budgetary surpluses in 1998.

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It also says that the greatest improvement in budgetary positions last year was in Ireland and Finland while the largest absolute reductions in debt ratios were observed in Ireland and Belgium.

It mentions Ireland, along with Luxembourg and Finland, as among those governments that have already achieved balanced budgets or even surpluses and intend to maintain or further improve such positions, allowing debt ratios to fall rapidly or remain low.

But the report warns that generally fiscal plans for 1999 and for the medium term signal a slowdown in previous efforts to consolidate public finances and create better conditions for growth and job creation.

"The projected fiscal effort in some countries could be regarded as being unambitious in the light of the favourable forecasts for real growth and interest rates," it says.

"It is important not to undermine the confidence achieved by previous convergence efforts and successful monetary policy," writes Mr Wim Duisenberg, ECB president, in the report's introduction.

The bank does not name those countries that it fears are at risk of breaching the deficit limit. But in an apparent reference to Italy, the report says its warning is important for countries "where the level of public debt is particularly high and the debt-to-gross domestic product ratio has started to fall only recently".

In other comments, the ECB says the euro area's unemployment problem should be addressed by addressing the underlying impediments to employment growth. It says several countries have already started to address these issues but implementing reform is a lengthy process and should not be delayed.

It reveals that the fully paid-up subscription of the Central Bank of Ireland to the capital of the ECB is €42,480,000 (£33,460,000) or 0.8496% of the total. Meanwhile, the liquidation of the European Monetary Institute (EMI), the ECB's forerunner, on June 1st last year resulted in the Central Bank of Ireland being allocated an €140,996 (£111,043) share of the EMI's operating loss which was offset against the contribution it had made to the resources of the EMI.