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October 2, 2011
EU Ministers to Debate Stimulus
European Union finance ministers next week will discuss whether governments with the strongest public finances can provide some budget stimulus to help support flagging economic growth in the 27-nation bloc.
The debate, set for a meeting Tuesday in Luxembourg, could signal a small reversal of a policy adopted by ministers in October 2009 that calls on all EU countries to start cutting their deficits in 2011. With post-crisis economic growth much slower than expected, the EU is under pressure from the International Monetary Fund and the U.S. to consider more stimulus.
The European Commission, the EU's executive arm, sought to debate the idea at the meeting, EU diplomats said. The idea is that countries not violating the EU's deficit limit of 3% of gross domestic product could allow their "automatic stabilizers"—government spending programs such as unemployment benefits that tend to rise during a slowdown—to operate without restrictions.
That means governments with the strongest finances—Germany, the Netherlands, Sweden, Finland and Luxembourg—could run smaller surpluses or bigger deficits than expected, diplomats said.
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"There are countries for which fiscal consolidation is less useful than others," said one diplomat.
But some countries, such as Italy, worry the debate could lead financial markets to doubt the commitment of the bloc's weaker nations to cut their deficits, said another diplomat familiar with the debate.
The policy change, if adopted by the stronger countries, isn't likely to provide much stimulus to the economy, given that the vast majority of EU governments are cutting their deficits this year and will continue to do so in 2012.
Euro-zone ministers meeting the day before will examine the measures proposed by Greece to put its economic adjustment program back on track. The euro zone and the IMF are largely satisfied with the new fiscal measures the government has proposed, including a real-estate tax and more public-sector layoffs, but they are seeking more proposals to open up Greece's closed service sector, a euro-zone official said.
An agreement to provide collateral for Greece's euro-zone lenders is closer to being finalized, the official said, with a solution nearly in hand to the problem of "negative pledge" clauses in some Greek bond contracts that prevent other creditors from getting more favorable treatment.
There is unlikely to be discussion on raising the currency bloc's bailout lending capacity, officials say, despite market expectations that the euro zone will need to take that step to prevent yields on Italian and Spanish debt from rising even further.
But European Council President Herman Van Rompuy is consulting with euro zone governments on new proposals to improve the currency bloc's economic governance that will be unveiled at a euro-zone summit on Oct. 18.
Those proposals may include more firepower for the European Financial Stability Facility, the euro-zone's sovereign bailout fund, the euro-zone official said
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