IMF Chief Blasts Weak EU Budget Rules

International Monetary Fund chief Rodrigo Rato attacked reforms of the euro zone's enfeebled budget rules Thursday; reforms rammed through by France and Germany to help them avoid punishment for violating regulations.

Rato, who in his previous job as Spain's finance minister was a staunch defender of the European Union's Stability and Growth Pact, said the IMF would look at the reforms "with great interest."

"We believe and I believe that the Stability and Growth Pact has served Europe well," he told a news conference on the eve of a meeting of finance ministers from the powerful Group of Seven nations. "In a very difficult moment of very low growth in many countries, the pact has been able to make a contribution ... to avoid an undesirable increase in public deficits in Europe."

The reformed pact "should guarantee that all countries are treated in the same way and in a transparent way," Rato added, echoing criticism of the way in which the pact's key deficit stricture was suspended for France and Germany.

Endorsing reforms to weaken pact

At summit talks last month, EU leaders endorsed reforms to the 1997 pact, which enshrines the rules underpinning Europe's single currency.

Eurozone heavyweights France and Germany fought hardest to push the changes through, having struggled for years to meet its headline limit requiring budget deficits be kept below 3.0 percent of output.

The European Central Bank, the guardian of the euro, expressed "serious concern" about the planned reforms, fearful they will encourage fiscal profligacy.

Rato said that in the new-look pact, euro zone governments should make reduction of their national debts a priority to get their healthcare and pension systems in shape for a rapidly ageing population.

"That should be the aim of any agreement between the European governments," he said. "One thing is clear: Europe needs to have better conditions for work with more people working, and working longer. The impediments to people finding work, and to working longer, should be removed."

Slashing growth forecasts

In its twice-yearly World Economic Outlook released Wednesday, the IMF slashed its 2005 growth forecast for the 12-nation euro zone to 1.6 percent owing to the impact of high oil prices and global economic uncertainty.

The report renewed calls for EU nations to revitalise their economies through long-term reforms in key areas such as labour markets.

IMF chief economist Raghuram Rajan said the euro zone's potential growth rate was now down to just 2.0 percent a year. "At those rates, Europe cannot afford its welfare state," he said. "European governments should face the facts that are needed to make that growth potential bigger."

He welcomed commitments to reform such as shake-ups to the pensions system in France and to the labour market in Germany. But much more needs to be done, he said.

"What Europe needs as a whole is more competition ... as part of the strategy of Europe to be a more dynamic player in the global market," he said.