EU to urge Asians to consume more, US to save more

BRUSSELS, July 10 (Reuters) Asian countries should allow their currencies to appreciate and boost domestic consumption, while the United States should cut its budget deficit to help ease global economic imbalances, a draft EU paper recommends.

The first in what will be annual reports by the European Commission said global imbalances are unprecedented in size and duration and cannot last for ever, according to a draft obtained by Reuters before publication on Wednesday.

The EU executive's report said a disorderly unwinding of global imbalances, such as the U.S. high current account deficit, would harm global economic growth.

''The key issue is now how to work together to avoid a disorderly correction that could involve undesirable movements in exchange rates, disruptive capital flow reversals and negative effects on investor confidence,'' the draft paper said.

To ward off the danger, Asian countries should allow their currencies to appreciate.

''There is ... a case for the economies in the Asian region to allow their currencies to appreciate more,'' the draft said.

''Exchange rate flexibility, while not directly addressing the underlying cause of imbalances, would help to provide a more flexible environment for imbalances to be resolved.'' It did not identify the Asian countries involved but said they should pursue policies, including boosting consumption, that would shift from export-led to domestically generated growth.

The draft said the key challenge for the United States was to increase private and public savings.

''This could be done through a combination of fiscal and monetary policy. It would be based on a credible medium-term consolidation programme,'' the draft said.

Measures could include ''broadening tax bases, restraining discretionary expenditure and reforming age-related entitlement spending'', and measures to boost private saving.

The paper noted that the effect of higher short-term U.S.

rates had been blunted by surprisingly low long-term interest rates, although these were now starting to rise.

''Higher interest rates, particularly long-term rates, would contribute to higher national saving,'' it said.

To play its part in easing global imbalances, the euro zone should carry out structural reforms that would help boost domestic demand, it said.

REUTERS DKS HT1925