Warning against extra time for deficits

A LOOSENING of budget-deficit limits would fuel inflation and hamper the economy’s recovery from its weakest growth rate in ten years, Europe’s leading central bankers said yesterday.

Governors of the European Central Bank (ECB) said they would fight EU governments’ proposals to grant countries extra time to bring down their deficits, saying this would sap confidence in the euro and slow eastern Europe’s bid to adopt the currency. A green light for wider deficits “would result in the longer term in potentially higher interest rates than otherwise,” Dutch central bank chief Nout Wellink said at a meeting of EU finance officials in the Netherlands.

The stability pact to limit government borrowing has caused trouble over the management of Europe’s economy ever since Germany imposed it over the opposition of France and Italy as a condition for creating the euro in 1999.