IMF’s euro gloom points to right fiscal path

April 19, 2012

By Pierre Briançon

The author is a Reuters Breakingviews columnist. The opinions expressed are his own.

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 that the International Monetary Fund 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 the 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 3 percent of GDP in 2013. But according to the IMF, both will miss their targets – Spain’s deficit will reach 5.7 percent of GDP, while France’s will stand at 3.9 percent.

The misses should lead to different conclusions in Madrid and in Paris. Spain’s target was absurdly unrealistic. Since the deficit stood at 8.5 percent in 2011, the target could only be met if country cut spending or raised taxes by a combined 5.5 percent 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 more than 56 percent 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 that Paris can’t simply wait for better days, especially with the weak GDP growth expected this year (0.5 percent) and next (1 percent).

What really matters in the current euro debate is not the targets by themselves, but what governments are doing – or not – to reach them.

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