Official Urges Greater Accountability by Euro Members

BRUSSELS — Olli Rehn, the European Union commissioner in charge of the euro currency, on Friday defended the bloc’s austerity policies and urged legislators to pass a law that would let him push countries even harder to shore up their finances.

Signaling little let-up in the need for wrenching adjustments in Europe, Mr. Rehn also issued warnings to a wide range of countries — including some with the region’s largest economies — to keep to the reform path and contribute to overall growth.

France and Finland need to address their declining competitiveness while Germany should do more to open up its services market, Mr. Rehn told a meeting organized by the European Policy Center, a research group.

Meanwhile Cyprus, which is negotiating a European bailout, needs to ease suspicions its financial sector is a hub for money-laundering, he said.

Mr. Rehn acknowledged the value of recent studies by economists at the International Monetary Fund suggesting that damage created by austerity was up to three times more severe than previously thought. But Mr. Rehn also warned those studies may not take sufficient account of the need to restore faith in countries blocked from borrowing money on international markets.

“We have not only the quantifiable effect, which is something that the economists like to emphasize, but we also have the confidence effect,” said Mr. Rehn.

“What would have happened if Italy would have loosened its fiscal policy in November 2011?” he asked, referring to a period when Italy’s borrowing costs were rocketing upwards. That situation threatened “both an economic crisis and political dead-end,” but recent reforms and belt-tightening had helped Italy’s economy to stabilize, he said.

Mr. Rehn said efforts were underway among the European Commission, the I.M.F. and the European Central Bank to reach a consensus on the impact of austerity policies.

Mr. Rehn also highlighted evidence showing that public debt levels in excess of 90 percent of Gross Domestic Product — a level in many parts of Europe — meant that economies were more likely to lack dynamism and to experience low growth lasting many years.

Underscoring the plight of Cyprus, the ratings agency Moody’s on Friday cut the country’s debt rating by three notches because of the capital needs of its banks that were heavily afflicted by an earlier debt write-down in Greece. Cypriot banks had invested heavily in Greek bonds, in large part to make use of money that had flooded into the banks by Russian depositors seeking a non-ruble haven.

In a sign of how difficult it will be to help Cyprus out of its financial black hole, Mr. Rehn gave no indications of when an assistance package would be finished. That package was still “very much a work in progress” and any decision would be made “in due course,” he said.

Cyprus still needed to implement “new laws against money laundering” as a precondition for aid, he said. Once “Cyprus reforms its financial sector in line with European principles, we will work alongside Cyprus as we did in Spain,” said Mr. Rehn. He was apparently referring to an agreement reached last year with the government in Madrid to extend tens of billions of euros in loans to restructure and recapitalize its banking sector.

Mr. Rehn also urged members of the European Parliament to speed up an agreement on fiscal legislation.

Those rules would require member states to present their public finance plans to the European Commission in greater detail, and sooner, than is currently required. The commission could then demand revisions, as deemed necessary. For member states that are already in financial trouble, those rules would let the commission conduct regularly scheduled reviews and require more information about a country’s financial sector than is currently the case.

The rules would give “stronger possibilities of pre-emptive oversight as to national budgets before they are finally presented to national parliaments” in order “to ensure that the member states practice what they preach,” said Mr. Rehn.

Failing to pass the law could invite a rerun of events in the middle of the past decade, when Germany and France essentially ignored their deficit-cap provisions, contributing to the current debt-crisis in Europe, warned Mr. Rehn.

“It’s a very serious issue,” he said.

Article source: http://www.nytimes.com/2013/01/12/business/global/official-urges-greater-accountability-by-euro-members.html?partner=rss&emc=rss