Borg warns of pump priming debt mountain
AFP/The Local · 1 Oct 2009, 10:23
Published: 01 Oct 2009 10:23 GMT+02:00
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"We are seeing a tentative recovery, obviously based on the very strong fiscal stimulus, monetary stimulus that we are now implementing," Borg said before the meeting in Gothenburg on Thursday.
"Obviously then we would have to discuss the exit strategies. Even if the policy would have to remain expansionary it is necessary to start to design and communicate the exit strategies," Borg added in reference to preparations in the autumn to return to a more balanced fiscal situation.
The leaders however were reluctant to put any fixed dates for a coordinated exit strategy to tackle bloated deficits.
"I think it is very difficult. I don't think that the implication of this international crisis is a symmetric one for each of the countries," said Portugal's finance minister Fernando Teixeira dos Santos.
"It's affecting every country differently. And every country will have to define its own exit strategy in its own time. I don't think we can have a precise schedule or a common schedule," he added.
With recovery set to remain "fragile and flaky" into 2011, according to Jean-Claude Juncker, Luxembourg Prime Minister and head of the 16 countries that use the euro, weak growth potential is holding states back from early withdrawal of massive stimulus funding.
The International Monetary Fund warned on Thursday that the fiscal legacy of the global crisis is "a high and rising (national) debt trajectory that could become unsustainable without significant medium-term measures."
A spiralling drain on public finances also amounts to a political conundrum for leaders facing hard-pressed voters at home.
With millions of jobs already lost and amid further fears of rising inflation, Anders Borg, said economic policy would still be "very expansionary in the coming period."
Twenty out of the 27 EU countries will be operating in the coming period above the bloc's threshold for deficits, originally pegged at three percent of Gross Domestic Product.
Among the heaviest is France, which this week indicated in its new budget that its public debt will soar to 84 percent of national output in 2010, again well above the theoretical 60 percent limit agreed when setting up the euro.
Warning that states cannot keep throwing good money after bad for ever, Borg said the threat of 100 percent debt levels for the biggest countries in a few years' time was of major concern.
"The crisis will have a negative impact on potential growth, so we need to boost labour supply and boost labour market flexibility to increase the potential growth of the European economies," he added.
He said that making a "timely withdrawal of the temporary stimulus," designed and communicated in advance, held the key.