Bloomberg News

ECB’s Paramo Says Deficits Over 3% Warrant Euro-17 Consent

November 25, 2011

(Updates with Gonzalez-Paramo comments from seventh paragraph.)

Nov. 25 (Bloomberg) -- European Central Bank Executive Board member Jose Manuel Gonzalez-Paramo said the euro area needs centralized budget controls that would require member states to seek permission for deficits above 3 percent of gross domestic product.

“A more fundamental deepening of fiscal and economic policy surveillance is necessary in the long run,” Gonzalez- Paramo said in a speech in London today organized by the European Economics and Financial Centre. “To ensure fiscal discipline, all planned deficits of more than 3 percent of GDP and those in excess of a country’s medium-term objective would need to be approved by all euro-area governments.”

ECB policy makers, backed by German Chancellor Angela Merkel, are pushing for steps toward a European fiscal union to complement the monetary union to stem the sovereign debt crisis. Germany and France said yesterday they will make proposals to amend European treaties in coming days to impose greater fiscal discipline on euro-area countries as they struggle to win back investor confidence.

Gonzalez-Paramo also proposed that nations whose deficits exceed the 3 percent rule in one year would automatically be required to redress the balance in subsequent budgets. States not complying with macroeconomic adjustment requirements would “temporarily lose financial autonomy,” he said.

ECB Bond Purchases

The ECB’s Securities Markets Program for purchasing government bonds, begun in May 2010, addresses malfunctions in financial markets, Gonzalez-Paramo said.

“It is essential that the nature of the SMP as a measure that supports the central bank in the pursuit of its goal of maintaining price stability does not distort the incentive structure among different policy actors that lie at the heart of” the monetary union, he said, adding the ECB “took note” of government commitments to cut deficits when implementing the program.

Commenting on the path of financial contagion in the current debt crisis, Gonzalez-Paramo said ECB studies showed concerns over Greece’s solvency increased doubts about other countries’ creditworthiness.

“Strictly on the basis of the credit default swap premiums quoted in the market,” Gonzalez-Paramo said, “these models, for example, find that a default in Greece increases the probability of Portugal defaulting on its public debt by 30 percentage points.”

Contagion pressures have “recently intensified, as they have spread beyond the euro area’s periphery and have started to affect larger economies,” he said.

--Editors: Matthew Brockett, Craig Stirling

To contact the reporter on this story: Jeff Black in Frankfurt at jblack25@bloomberg.net

To contact the editor responsible for this story: Craig Stirling at cstirling1@bloomberg.net


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