Ministers seek thrift while good times roll

EU finance ministers will this week discuss their collective failure to take advantage of the strengthening European economy to cut budget deficits and improve the quality of public finances.

For the informal Ecofin council in Berlin (20-21 April) the German presidency has invited outside experts to contribute to a discussion on fiscal policy. The experts include professors Dennis Snower of the Kiel Institute for the World Economy, Michael Devereux of Oxford University and Rik van der Ploeg of the European University Institute, Florence, who will lead discussions on budget issues, including the role of budget policy in improving human capital and fostering social inclusion, and the impact of globalisation on tax revenues.

The efforts which Germany has made to improve its fiscal policy, escape from the Stability and Growth Pact’s excessive deficit procedure (EDP) and achieve greater budget discipline by keeping the lid on public expenditure, is, Brussels-based officials say, an example of the strong leadership on budget policy which the EU needs. "The fact that Germany is standing behind the new pact is very important," says a senior EU official. But there are questions about how to capitalise on this progress.

One issue, according to a Commission official, is whether or not the Eurogroup of eurozone finance ministers can play a more effective role in co-ordinating not only budget policy, but also structural reform. The informal character of the Eurogroup, the fact that finance ministers do not like to appear to meddle in the affairs of their peers and the problems the Eurogroup has in communicating publicly, are cited as factors limiting its influence.

There is also a question about whether, and to what extent, the preventive arm of the stability and growth pact can be reinforced so as to maintain pressure on governments to cut deficits and move towards balanced budgets.

This is more difficult now that so many EU members are below the 3% deficit limit established by the Maastricht treaty. "We are no longer in an EDP world. Only two countries, Italy and Portugal remain in the EDP and both could be out of it next year. Therefore we must put emphasis on behaviour in good times through the preventive arm of the Pact," says one official.

• EU finance ministers are expected to discuss the role of hedge funds and private equity funds in the global economy at their Berlin meetings next week. This will form part of the EU’s preparations for this year’s Group of Eight (G8) summit on 6-8 June in Germany. According to one banker following the issue, German hopes that EU governments might be able to exert pressure for greater transparency in the activities of hedge funds are not being fulfilled.

"My understanding of the situation after the International Monetary Fund meetings in Washington last week is that investors, lenders to hedge funds and their prime brokers are being pressed to keep their risk management systems up to date and that there is some discussion of a voluntary code of conduct, but that is all." If this is correct, he added, then it suggests that New York and London, the major financial centres, have skilfully headed off pressure for stricter controls.

EU economics, industry and research ministers will discuss some of the key issues affecting the competitiveness of European business at an informal meeting in the Bavarian city of Würzburg next week (26-28 April).

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