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Euro Leaders May Need to Ease Deficit Plans, IMF’s Shafik Says

European authorities should consider relaxing fiscal consolidation targets for some euro-area countries as they may exacerbate economic slumps and undermine public support, International Monetary Fund Deputy Managing Director Nemat Shafik said.

“Fiscal adjustment plans for this year are broadly appropriate in Europe,” Shafik said in prepared remarks for a speech at the Brussels Economic Forum in the Belgium capital today. “In a few euro-area countries, however, the nominal fiscal targets for 2013 agreed before the current slowdown in growth may prove too pro-cyclical and may need to be adjusted or at least expressed in structural terms.”

Shafik also said the European Central Bank could loosen policy further to keep inflation from slipping too far below its goal of just under 2 percent. Data today showed euro-area price growth eased more than economists forecast in May to 2.4 percent. As well as pushing back deficit deadlines for some euro members, leaders should also look at increasing financial integration to ease market pressures, she said.

“Greater fiscal integration would contribute to lowering sovereign yields and would likely improve the ability of countries to access markets to finance their debt,” Shafik said. “Such steps would involve providing banking support from a common resource pool independent from national sources, sooner rather than later.”

While a common backstop would entail “some fiscal risk-sharing,” Shafik said restoring stability will require “additional pooling of sovereignty.”

To ensure that banks getting pan-European support are properly restructured, they could be made subject to centralized regulation and supervision “through a joint bank resolution authority with a common backstop and a single deposit insurance fund,” Shafik said.

On the relaxation of budget-deficit deadlines, she said that in many countries, “reform fatigue is setting in.”

“Losing public support now, at this critical juncture, risks negating the efforts of the past two years, and will set Europe back,” she said.

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