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. Last Updated: 07/27/2016

ECB Tells Countries: Cut Public Spending

STOCKHOLM, Sweden -- The European Central Bank has urged euroland countries to cut public spending to avoid breaking budget deficit limits in the next few years, a Swedish newspaper said Wednesday.

In a confidential report, published by Swedish newspaper Svenska Dagbladet, the ECB was sharply critical of the budget policies of many of the 11 countries in Europe's economic and monetary union, or EMU.

Countries joining EMU agreed to limit annual deficits to 3 percent of gross domestic product, with penalties for breaching this target, and aim for a balanced budget or surplus over an economic cycle.

This was the price extracted by Germany - itself one of the countries criticized in the report - for agreeing to abandon the Deutsche mark and enter the single currency.

"The majority of euro countries are still far from the budget target, and the three biggest economies - Germany, France and Italy - are closer to the 3 percent limit than to a balanced budget," the newspaper quoted the report as saying.

The ECB urged euroland countries to review their budgets for the next few years and undertake long-term or permanent savings, the newspaper quoted the report as saying.

The report says that certain countries only managed to meet the entry criteria through "temporary measures" affecting the way public accounts were drawn up in the year in question.

Furthermore, much of the improvement in government finances was due to the record low interest rates, which reduced the level of interest payments on public debt.

"It cannot be assumed that these low interest rates will continue for the next few years," the newspaper quoted the report as saying.

The ECB itself is responsible for setting the rate on the euro.

The report says there is a risk that in the next few years many of the major euro zone countries will not be able to face a normal downturn in the economic cycle without breaching the stability pact's 3 percent limit.

This could have unforeseeable consequences and undermine confidence in the euro in its early years, it said.

In its July monthly report released Tuesday, the ECB said there was nothing unusual about differing economic trends among euro zone nations, downplaying worries that the currency bloc is too diverse to be governed by a single monetary policy.

The ECB said different economic growth, employment and other trends within the euro zone were normal and that it expected such inconsistencies to even out over time.

But the Central Bank said economic variations were unlikely to disappear completely and that as yet it could not assess whether they posed a problem to monetary policy.

In the run up to monetary union, some economists expressed concern that Europe's national economies did not have enough in common for one interest rate to prevail everywhere.