ECB says can cut deficits and debt without killing growth

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The European Central Bank said Thursday that eurozone countries could cut deficits and debt without killing growth prospects, especially if the efforts were focused on reduced spending.

"Overall, the longer-run benefits of fiscal consolidation are largely undisputed," the ECB said in its monthly report for June.

The central bank stressed that "there is an urgent need to accelerate the correction of fiscal imbalances in many euro area countries to restore sound public finances."

Many European political leaders would agree with the second statement at least but there is disagreement over whether countries should tighten their finances first or wait until economic growth has found a more solid footing.

The ECB cited past studies of Belgium, Finland, Ireland, Netherlands and Spain and concluded that cutting spending rather than raising taxes was most likely to yield long-term benefits.

Case studies "found that fiscal consolidations based on expenditure reforms were the most likely to promote output growth, especially when combined with structural reforms," such as those to the labour market and pensions, the ECB said.

It added that when a broader range of examples was looked at "it is found that around half of the fiscal consolidations in the EU in the last 30 years have been followed by an improved output growth performance in the short term."

That was particularly true for countries "with precarious fiscal starting positions" like the high deficits or debt that mark eurozone members such as Greece, Ireland, Italy, Portugal and Spain.

© 2010 AFP

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