Europe urged to use economic growth to rein in debt

Europe urged to use economic growth to rein in debt

After lauding national efforts to balance budgets, he warned continued high overall debt and the growing cost of rapidly aging societies would require continued fiscal rigor for years to come.

"We must create now, during this year and the next years of economic recovery, a budgetary margin of maneuver to be able to weather the next economic downturn," Almunia told reporters.

He is urging governments to put windfall tax revenues into paying off debt, allowing them to make much-needed reforms to improve European economies.

Almunia said projections for next year show only three EU nations — Portugal, Poland and Hungary — would fail to stay below the bloc's mandated budget deficit threshold of 3 percent of gross domestic product. By comparison, the EU's average budget deficit was above that mark in 2003.

On average, he said, the deficit was forecast to fall to 1.4 percent of GDP in the 13-nation euro-zone this year and 1.1 percent next year. In the 27-nation EU as a whole it would drop to 0.7 percent in 2009.

"It is absolutely clear that we need to use good times in the economic cycle to put public finances in a sound and sustainable position," he said.

Presenting the reviews of Romania, Bulgaria and Latvia, he said he was concerned about a loosening of fiscal policies in those countries, especially at a time of better economic growth. "Stability oriented fiscal policies are key for sustainable economic development," Almunia said.

Bulgaria may have high growth but lacks sufficient labor market flexibility. There are shortages of highly skilled workers. Furthermore, emigration and a drop in fertility have contributed to a rapid shrinking and aging of the population.

In Romania, an economic upturn has seen little increase in the employment rate. At the same time, it faces the same problems when it comes to emigration and the aging of its population.

Latvia may have high economic growth, yet faces relatively high inflation that is pushing up wages.

Even though Almunia lauded Spain and Belgium for their 2007 budgetary plans, he did warn them to stick to fiscal rigor to deal with the financial impact of their aging societies in the decades to come.