Euro zone members won’t meet their fiscal targets, but that doesn’t mean they should all force themselves to be even more austere. This is the message the International Monetary Fund (IMF) is sending to Europe’s troubled economies. Both, disciplinarian central bankers and populist politicians should take note. Austerity remains a must. But too much, too fast will be lethal.
Spain and France illustrate the point IMF is trying to make. Both should have budget shortfalls next year that will be much higher than forecast, the Fund says. Both countries were supposed to shrink their deficits to three per cent of GDP in 2013. But, according to IMF, both will miss their targets — Spain’s deficit would reach 5.7 per cent of GDP, while France’s would stand at 3.9 per cent.
The misses should lead to different conclusions in Madrid and Paris. Spain’s target was absurdly unrealistic. Since the deficit stood at 8.5 per cent in 2011, the target could only be met if the country cut spending or raised taxes by a combined 5.5 per cent of GDP over two years. Spain needs understanding from its euro zone partners: flexibility is needed to implement painful reforms that need political support.
For France, on the other hand, the IMF report should serve as a wake-up call: more needs to be done. Nicolas Sarkozy and Francois Hollande, the main presidential candidates, seem impervious to the need to seriously shrink the public sector. In a country which hasn’t balanced a budget since 1976, cutting public spending — a euro zone record at 56 per cent of GDP — is in and by itself a structural reform.
This government-heavy economy sets the country apart from other euro zone members. The IMF forecast shows Paris can’t simply wait for better days, especially with the weak GDP growth expected this year (0.5 per cent) and the next (1 per cent).
What really matters in the current euro debate is not the targets by themselves, but what governments are doing — or not — to reach them.
