The Netherlands doesn’t need to take drastic action to trim its budget in the face of lower revenues as a result of slower-than-expected economic growth, said Xavier Debrun, an International Monetary Fund official.
“They are not under market pressures; the numbers are not catastrophic,” said Debrun, a deputy division chief at the Washington-based IMF. To the extent that the Netherlands misses its budget targets because of a slowing economy, “our view is that they should not respond.”
Skittish financial market conditions mean countries should stick to their announced plans whenever possible, Debrun said today in a speech at Bruegel, a Brussels research institution. At the same time, if “disappointing” growth leads to lower revenues, “don’t go into panic mode to compensate. That wouldn’t be a good idea” for a country like the Netherlands that has borrowing room, he said.
Dutch Prime Minister Mark Rutte pulled the plug on his minority government this week after budget talks collapsed over proposed pension reforms. Rutte tendered his resignation to Queen Beatrix yesterday. She indicated that she’d consider his offer and asked that the Cabinet handle current affairs in the meantime. Rutte is seeking to build support for austerity measures in a bid to meet European Union budget targets.
For countries that have trouble accessing financial markets, the euro area’s rescue funds should be accessible if needed, Debrun said when asked if Spain would need a bailout.
“Firewalls are there to be used if they need to be used,” he said. “It’s not just a deterrent.”
For the EU as a whole, the IMF view is that “the current speed of adjustment is broadly appropriate” as countries strive to cut deficits and rein in debt levels, Debrun said. Countries need to keep an eye out for “downside risks to growth” as they plot their fiscal strategies.
“It is absolutely essential to get the speed right,” Debrun said. “It would be a pity to go for fiscal overkill that would ultimately destroy growth in the short term.”
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