Public debt could threaten EU growth, warns head of financial committee

Date: 11/07/02

By Jyrki Karvinen

EUROPE has all the prerequisites for economic growth, as long as its situation is not upset by excessive public debt, according to Finnish Under Secretary of State Johnny Åkerholm, chairman of what may be the EU's most secretive body, the Economic and Financial Committee (EFC).

Åkerholm has an explanation for the closed-door policy: the committee only does preparatory work, while the Ecofin ministerial council makes the actual decisions.

The EFC's agenda includes issues affecting markets and currency rates. Checking his monitor, Åkerholm points out that the euro continues to strengthen, while all stock indices are in the red. 'The stronger euro brings greater purchasing power,' he says.

The committee is now working on regulation of financial markets and screening ways of implementing policy coordination. Next autumn, it will review the present practices and ways to improve on them.

Åkerholm says it is not enough to simply concentrate on the institutional status of different bodies; it is more important to assess what they actually do.

The EFC has completed the revision of the European Commission's proposal for broad economic guidelines for the Ecofin council. The Union has a common monetary policy, but not an economic policy.

'Economic policy in the EU is highly fragmented,' says Åkerholm. 'What is the EU's economic policy line?' he asks rhetorically. The answer should be found in the broad economic policy guidelines, but this is not yet perceived by either markets or the public.

According to Åkerholm, the answer from the member states, on a general level, is that coordination of economic policy should be developed, since there is a common monetary policy.

However, progress has been only gradual. The member states already have fierce budget battles at home. In practice, there is no readiness to transfer any area of economic policy to be decided at the EU level. The EFC is drafting a proposal on common securities and financial markets and how they should be regulated, to be submitted to the Ecofin council by the end of September. At the moment, preparation of this report is taking up most of the committee's time.

Åkerholm is confident about European economic growth because he sees the economy as balanced, which is not true in the US or Japan.

His main concern, though, is the danger of over-indebtedness in the public sector.

Åkerholm recalls the 1990s, when member states were competing to join the euro zone.

They were cutting public debt at the same time as Japan, for example, was increasing its public expenditure. This discipline led to economic growth in the EU.

Germany recently released a budget proposal in which federal expenditures would be cut by 0.5%. As Åkerholm sees it, this is a move in the right direction.

There is a question mark over France, however. The government promises to carry out tax reforms, but the whole picture is not yet clear. Although Åkerholm declines to comment, it is not hard to guess what he would like to see.

'One must realise that the growth and stability pact was not created for the good of the EU itself, but in order to balance the public sector economy and to ensure economic growth,' Åkerholm says. But even he does not yet have an answer to how and at what level the coordination of EU economy policy should be developed.

The ultimate goal is clear, though: the consumer must know what the EU's economic policy is, and have complete confidence in it.

Europe has all the prerequisites for economic growth, as long as its situation is not upset by excessive public debt, according to the chairman of the EU's Economic and Financial Committee (EFC).