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Stick to tough budgets or growth will stagnate, Europe warned

Europe is at risk of stagnation if policy makers slow down implementation of tough budget policies, the EU's Director General for Economic and Financial Affairs said.

Speaking in Dublin Marco Buti, head of the European Commission's economics department, says Ireland has made "major strides improving competitiveness".

But he warned: "It is not yet time to rest on our laurels."

Mr Buti is a senior official in European Economy Commissioner Olli Rehn's department.

While growth has returned to the eurozone and to Ireland it is fragile and modest he said. Any change of policy could be economically damaging because it could confuse consumers and investors, he said.

That's because uncertainty about the policy approach could create an "incentive to postpone investment, consumption and employment decisions," he said.

The timing of the comments ahead of next month's Budget will be seen as a thinly-veiled call on Ireland to stick with hard-line savings targets next year. "After years of efforts, reform fatigue is discernible in a number of member states, but now is not the time to relax our efforts," Mr Buti said.

Policy makers should not react to the tentative growth seen in the second quarter of 2013 by easing up on the implementation of budgetary consolidation, he said.

"While the risk of catastrophic outcomes like a euro-area breakup – that was quite present 15 months ago – has vanished, if we do not advance with the implementation of the necessary policies, a prolonged period of stagnation looms," he said.

Mr Buti was speaking at a meeting of the Institute of International and European Affairs in Dublin.

Ireland has made "major strides in improving competitiveness," in recent years – resulting in lower inflation and lower increases in wages compared to other countries, he said. That has made for slower progress in addressing the country's debt ratio, he admitted.

"This is not due to lack of efforts, but rather the double challenge of simultaneously putting public finances on a sustainable footing and restoring competitiveness," he said.

Failure to sort out Europe's banks has led to a drag on economic growth he said, in particular compared to the US.

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