Europe must enact a tough new system of budget control that
will ensure governments that rack up excessive deficits suffer
harsh penalties, leading policymakers and economists said
The warning comes as a tug-of-war between national
sovereignty and the push for fiscal co-ordination in the
eurozone threatens to trigger a sovereign debt crisis.
Vito Tanzi, a former Italian deputy finance minister and
head of fiscal affairs at the IMF, said the European Commission
had to do a much better job of scrutinizing members
states budget policies.
If we have come to the stage where a small
country like Greece can put the entire global financial system
at risk, we really have to rethink the system, he told
Deeper political union is no guarantee. The only way
to ensure that this works is through rules with penalties
attached to them. We need penalties backed by formal laws in
Charles Wyplosz, an acknowledged expert on the euro, agreed
that collective fiscal discipline overseen by the stability and
growth pact had failed.
Wyplosz, an economics professor at the Graduate
Institute in Geneva urged member states to adopt national rules
based on the fiscal rule Germany enshrined in its constitution
They must make it tougher and have the sorts of
punishment that work, he said. They have threatened
[in the past] but at the end of the day a government does what
it need to do to be re-elected. That is what will happen in
Greece later this year - and in Portugal and Spain.
Carlo Cottarelli, the current director of the fiscal
affairs department at the IMF, told Emerging Markets
Western countries urgently needed to enact laws which punished
governments that flouted fiscal rules.
Clearly, advanced economies need to construct a
mechanism for enforcement of fiscal rules in addition to
strengthening their public finances, he said.
Cottarelli said: Penalties are needed and the best
benefit of this is the political loss that comes with breaching
these rules or targets.
On Thursday, the European Commission called for a
centralized review of government budgets, in a baby step toward
greater co-ordination in fiscal affairs.
Barry Eichengreen, an economics professor at the University
of California, said Europe needed a stability pact with
[It needs] a pact where there are stricter limits on
deficits, not a focus on arbitrary limits but where the
Commission intelligently looks at debt sustainability, he
And we need a proper enforcement mechanism with
penalties. If the commission cant do it, then there
should be an external fiscal council to do it.