US and Japan need ‘credible’ fiscal consolidation, says EU

28 May 12

The United States and Japan must implement credible fiscal consolidation plans to play their part in building a sustainable recovery, the presidents of the European Commission and Council said on Friday.

By Nick Mann | 28 May 2012

In a letter sent to the leaders of European Union member states, commission president José Manuel Barroso and council president Herman Van Rompuy said the EU should use next month’s G20 summit in Mexico to remind the world’s other leading nations of its role in boosting growth.

In particular, they warned of the wider impact of current plans for fiscal consolidation in the US, after the country’s Congressional Budget Office said last week that tax rises and spending cuts due to take effect at the end of this year could send the US into recession in the first half of 2013.

‘Whilst we are firmly focused on playing our part, at Los Cabos all other G20 partners should also recognise their responsibilities in building a sustainable recovery,’ Barroso and Van Rompuy said. ‘We believe that there should be a renewed emphasis on rebalancing the global economy, and we must reflect on accountability under the G20 Framework for Growth.

‘In this regard, the EU should urge the US and Japan to implement credible medium-term fiscal consolidation plans, in particular to avoid the "fiscal cliff" in the US at the end of the year.’

China should also continue to strengthen its social safety nets, carry out further structural reforms and move to a market-determined exchange rate, they added.

The letter also called for progress to be made in reforms of the International Monetary Fund which would give developing world countries a bigger say in how the organisation is run. Full implementation of these reforms is a ‘critical element for boosting the legitimacy, credibility and effectiveness of the IMF’, it said.

‘The EU is on track for the timely implementation of the 2010 IMF quota and governance reforms, and all EU member states expect to complete their ratification by the agreed deadline. We should encourage all other IMF members to do likewise,’ it added.