EU Finmins See 2010-11 Start Of Fiscal Tightening

There have been no dates mentioned so far for the start of the process, since no one knows when the recovery will start.

European Union finance ministers will call on Tuesday for rapid budget tightening once the economy starts recovering, adding most countries would begin it in 2010 and some a year later, a draft document showed.

The document, obtained by Reuters, spells out key economic issues for the 27-nation EU to be brought to the attention of EU leaders at their March 19-20 summit.

Establishing a path of reining in budget spending once the slowdown has subsided is crucial for rebuilding confidence in government fiscal policy among markets and consumers.

There have been no dates mentioned so far for the start of the process, since no one knows when the recovery will start.

The finance ministers will note that as a result of the recession and fiscal stimuli aimed at cushioning the impact of the slowdown, the EU's budget deficit will reach 4.4 percent of gross domestic product this year, the highest in 15 years.

"Therefore, swift and credible reversal of the fiscal expansion should be ensured, keeping pace with the economic recovery," said the draft, obtained by Reuters.

"Most member states will start their consolidation efforts in 2010, while those who have the most margin for manoeuvre will start in 2011," it said.

The European Union has imposed a limit of 3 percent of GDP on budget deficits, but at least 12 countries are expected to breach that limit this year.

Normally a deficit in excess of 3 percent should be brought back below within two years of it occurring, but with deficits forecast to reach double digits in some countries such as Ireland, that approach is not practical.

"Significant excess of public finance deficit needs to be accommodated by longer deadlines for correction, but faster annual average consolidation," the finance ministers will tell their prime ministers and presidents.

The benchmark annual consolidation mentioned in the Stability and Growth Pact -- the EU budget rules that underpin the euro -- is 0.5 percent a year until a country reaches budget balance or surplus.

The ministers will also back plans for tighter regulation and supervision of financial markets so as not to allow another credit crunch to happen.

The ministers will support regulation of hedge funds and alternative investment vehicles, the registration and oversight of credit rating agencies.

They will say that high priority should be given to ensuring that central banks and supervisors can assess cross-border and systemic risks quickly and comprehensively and back the creation of international colleges of supervisors for cross-border banks.

Such ideas are part of a report prepared for the European Commission by a group of experts led by former French central banker Jacques de Larosiere, and finance ministers will broadly back the report's conclusions.

They will also say the European Union will back at the next G20 meeting a call to boost the amount of money made available to the International Monetary Fund for helping countries in trouble.

"The Economic and Financial Affairs Council takes the view that the IMF requires a substantial increase in its resources to assist countries particularly affected by the financial crisis and should play a key role in multilateral surveillance and crisis prevention," the draft said.

The IMF has called for a doubling of its funds to $500 billion for short-term needs.