EU must use all tools to limit slowdown: Almunia

The European Union must use all means at its disposal, including monetary and fiscal policy, to limit the economic slowdown, Economic and Monetary Affairs Commissioner Joaquin Almunia said on Tuesday.
Emphasising the scope within EU rules for allowing higher government spending and deeper tax cuts at times of economic crisis, he said the 27-nation bloc should seek a concerted policy response to help boost the economy just as it did to restore confidence in the financial sector. "This means using all the policy instruments we have available to limit the slowdown, protect jobs and lay the ground for a sound recovery. The first tool is monetary policy," Almunia said in a prepared speech.
"The recent fall in inflation has opened the way to interest rate reductions to help sustain consumption and investment. The European Central Bank has already demonstrated its readiness to act with two cuts in the last weeks," he said.
The European Central Bank has cut interest rates by 100 basis points to 3.25 percent since October and economists expect more easing as they forecast the eurozone economy to be in recession next year.
Budgetary policy should also cushion the slowdown, Almunia said. He noted that slower growth would inevitably increase budget deficits and that the emergency measures to support the banking sector were already having pushing up debt.
But he said the EU's budget rules, the Stability and Growth Pact, had enough inbuilt flexibility to manage the deterioration in public finances. "We invite member states to draw fully on the flexibility of the Pact," he said, but added fiscal policy should remain sustainable.
The pact sets a limit on budget deficits of 3 percent of gross domestic product. If this limit is breached, EU ministers start disciplinary steps against the offending country which could end up in fines, although they never have so far.
"The pact provides for specific treatment when 'exceptional circumstances' exist," Almunia said. He reiterated that if the deficit rises above the 3 percent ceiling only temporarily and by a small amount the disciplinary steps need not be started.
He said that even when such disciplinary procedure is opened, if the economic situation is difficult the deadlines for the cutting the excessive deficit can be longer than the one year foreseen by the pact. "And if this situation continues at the end of that period, new recommendations can be issued without advancing to the next steps in the procedure," Almunia said.