Moves on budget deficits prompt warning from Duisenberg

European Central Bank (ECB) president Mr Wim Duisenberg has warned that member-states that failed to bring budget deficits under control risked undermining the euro.

Although not mentioning them by name, it was a clear warning to France and Italy, which are pressing ahead with tax cuts while rowing back on promises to balance their budgets.

"I have seen some worrying developments in fiscal policy in some countries in the last few months," Mr Duisenberg told the European parliament in Strasbourg. He said it was vital that all countries had their budgets close to balance or in surplus by 2004 at the latest, in line with the euro's growth and stability pact.

Portugal and Germany, the other two states struggling to tame deficits, have adopted tough economic policies to address the problem.

Italy's final 2001 budget deficit could rise by 0.3 per cent of gross domestic product to 1.9 per cent of GDP if Eurostat this week requires Italy to alter its accounting for state assets that were securitised last year, an Italian Treasury official said.

Italy tried to lower its deficit last year by selling securities backed by the future sale of state-owned real estate and by future income from the state lottery. But Eurostat is expected to rule that Italy can only account for a proportion of those securities since much of the real estate sales and the lottery income are due this year and next.

Last week, Italy had to revise its 2001 deficit to 1.6 per cent of GDP from 1.4 per cent because of spending in the health sector and lower tax returns than first calculated. It had been aiming for a deficit of 1.1 per cent.

Mr Duisenberg told MEPs the inflationary outlook for the euro zone was "less benign" than in November 2001, when interest rates were last cut to 3.25 per cent. "Inflation has so far declined less steeply and less rapidly than we expected at the turn of the year," he said.

His most pressing concern was the recent switch by investors from shaky financial markets to liquid and safe assets, which, coupled with an increase in demand for credit, could stoke inflation.

"Even though the appreciation of the euro will contribute to the easing of inflationary pressures, we will continue to monitor all developments," he said.

Mr Duisenberg also expressed disappointment that inflation had exceeded 2 per cent last year, missing the bank's definition of price stability of zero to 2 per cent, and warned that recent high wage agreements in the euro area had been a source of concern.