EMU: CALL FOR A RETURN TO BUDGET CONSOLIDATION.

In budgetary terms, 2001 proved to be the most delicate of the three years since the introduction of EMU. The global slowdown represented the first test of the Euro-zone's multilateral surveillance mechanism. Budget deficits increased in 2001 to 1.3% of GDP, compared with 0.7% in 2000, the first interruption in the budget consolidation process since 1993 (see European Report 2679 for further details of the latest economic forecasts for the EU).In spite of this negative development, the study shows that surveillance operated well, for several reasons:- The majority of Euro-zone countries have sufficient margin to allow automatic stabilisers to play their buffer role. Deficits have nevertheless begun to grow in Germany and Portugal, approaching the limit of 3% of GDP set down in the Treaty.- The Member States have not indulged in unjustified expansionist policies. Compared to 2000 the structural budget deficit remained practically unchanged in 2001. In spite of the general economic downturn, balances have not deteriorated in Belgium, Denmark and Italy, and even improved in Greece, Spain, Austria and Sweden.- Countries have been able as anticipated to pursue fiscal reforms. EMU budgetary rules highlight the need to ensure these reforms are accompanied by spending cuts, since tax cuts are rarely self-financing.However, this positive general assessment is tempered by a measure of prudence. Not all the Euro-zone countries have achieved a situation close to balance or surplus (Germany, Portugal, France and Italy). Should they prove unable to do so quickly, "a serious recession may at some future point test the EU budget surveillance mechanism much more rigorously". The consolidation process must therefore be re-launched "to rapidly make up lost ground", according to the text.Germany and Portugal.The surveillance process entered a critical phase in January 2002 when the Commission decided to activate the early warning mechanism in respect of Germany and Portugal (see European Report 2659 for further details), both countries having exceeded the deficit target for 2001 set in their respective stability programmes by more than 1%. The Finance Council finally decided not to activate the mechanism after the two countries made firm political commitments in response to the Commission's concerns. However, for the pact to remain credible, it is essential that Germany and Portugal honour their commitments. Germany has notably concluded an agreement between...