The International Monetary Fund said this afternoon it was essential to strengthen parts of the euro zone's budgetary rulebook following the suspension late last year of the so-called Stability and Growth Pact.
In its semiannual World Economic Outlook, the IMF said the Pact - suspended when European Union finance ministers failed to endorse sanctions against Germany and France for persistent breaches of budget deficit limits - was "instrumental to the pursuit of sound policies."
"One should not dismiss the benefits of the Pact," IMF chief economist Raghuram Ragan told a press briefing on the report. "The discipline it imposes is very beneficial, especially for the new EU members joining soon."
But the Fund said more attention could be given to outstanding public debt and the sustainability of national finances when assessing budgets. This should also address issues like unfunded pension liabilities, encouraging consolidation in good times and measuring the quality of adjustment.
The IMF said it expected France and Germany's annual budget deficits to remain above the Pact's limit of 3 percent of gross domestic product (GDP) through 2005 but called for a more considered view of the situation.
It said progress on underlying structural deficits, as opposed to additional spending or revenue losses associated with the economic climate, was most important. In this respect, account should be taken of governments taking on credible structural reforms of their economies.
"Underlying fiscal adjustment of at least 0.5 percent of GDP based on high quality measures strikes the right balance between the short-term need to avoid undercutting the incipient recovery and the medium-term need for further consolidation," the report said.
But further out, countries deciding to implement structural changes "could be given limited leeway to implement budgetary targets in a cumulative fashion rather than on a year-by-year basis."
Elsewhere in the IMF outlook, the fund said the strength of the euro zone recovery this year was subdued relative to the rest of the world and the European Central Bank should cut interest rates again if the situation deteriorated.