Serbia Should Cut Costs, Raise Output, Fix Dinar, Mundell Says

Serbia should work to cut the government’s spending gap, boost output and fix the dinar to the euro to stabilize it before discussing whether it joins the euro region once it becomes a European Union member, said Robert Mundell, a Nobel-prize winning economist.

The Balkan country should keep current monetary policies of targeting inflation and allowing the national currency to trade freely for now, he said today at Belgrade conference.

In the longer term, it should “increase productivity, balance the budget and then try some kind of a currency board system,” Mundell said. “Right now, the exchange rate is depreciating and you can’t fix it,” he said.

Serbia is working to become an official EU candidate by the end of 2011 and win a date for the start of entry talks. Having a currency peg before taking the step to enter the euro region would give Serbia time to decide what is best for the economy.

“If you don’t like it, don’t join it,” he said.

Mundell said Serbia should not rely on Eurobond issues for deficit financing. “You might want to do that and it will be a measure of your credit rating,” he said, commenting on today’s reports that Serbia plans to sell 10-year bonds in dollars.

Instead, a small, open economy should rely on investments for growth, with the government making sure that public debt-to- gross domestic product ratio stays below 40 percent at all times.

To contact the reporter on this story: Gordana Filipovic in Belgrade at gfilipovic@bloomberg.net

To contact the editor responsible for this story: James Gomez at jagomez@bloomberg.net

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