Commission tells member states to adjust their economies further

Italian finance minister, Roberto Gualtieri, during the Ecofin Council on 10 October. [Photo: Council]

(Updated with the list of countries after publication of the letters)

The European Commission sent a number of letters to member states that are at risk of missing their fiscal targets for 2020. Brussels wants more information on how they intend to balance their public finances.

Italy and Spain were among the eurozone countries that received a letter, an EU official had told on Monday evening, before they were submitted on Tuesday morning (22 October). 

Belgium, France and Portugal also received a missive on Tuesday.

According to EU rules, the Commission must seek additional information within the seven days after the submission of national budgets. Most of the draft plans were sent to Brussels by the 15 October deadline.

Finland, whose government sent its 2020 draft budget on 7 October, also got a notification seven days later. Helsinki replied two days after.

The letters come just as the Commission and other institutions, including the ECB and the IMF, are urging European countries to reduce their high debt levels.

They are also calling on other economies, especially Germany and the Netherlands, to dig deeper into their pockets and stimulate their output.

Growing pressure on eurozone economies to launch stimulus

The European Commission and some member states including France followed the ECB in pressing Germany and other countries with fiscal space to invest more to counter the risk of recession.

Significant deviation 

Following the submission of the draft budgetary plans for 2020, the EU executive had some concerns with various countries incurring a “significant deviation” in regards to their targets.

The Commission is worried about compliance with the structural balance, which excludes changes in the economic cycle and one off expenditure and revenue measures.

The structural deficit is the main indicator in monitoring member state public finances once the countries fall under the preventive arm of the Stability and Growth Pact.

Spain, the most recent country to exit the excessive deficit procedure last Spring, registered the largest structural deficit among eurozone countries last year, around 3.2% of GDP (more than €38 billion).

Meanwhile, Italy has been at loggerheads with the Commission for the past year over its spending plans, as the country is not reducing its immense public debt of around 138% of GDP, according to some estimates.

Italy escapes EU budget sanction procedure after spending cuts

The European Commission concluded on Wednesday (3 July) that Italy was no longer breaching the EU’s fiscal rules after the government reduced public spending by €7.6 billion in a last-minute effort to escape a sanction procedure.

Last July, the Commission held off launching a sanction procedure against Rome for the second time, in exchange for new adjustments. 

Instead, Italy’s draft 2020 budget includes an increase of the structural deficit to 1.4% of its GDP, compared with 1.2% this year. EU rules said that structural deficit should actually be cut by 0.6% of GDP next year.

An Italian government source told Reuters that Rome will reply to the Commission letter by Wednesday. 

Not the same

EU sources, however, pointed out that the Italian and the Spanish case are not the same given that Madrid has an interim government. 

Spain submitted an extended budget for next year for the second time, as the government failed to pass a budget before calling snap elections last April. Given the inconclusive results, the country is expected to return to the ballot box again on 10 November.

The letter sent to the caretaker socialist executive led by Pedro Sánchez is described rather as a signal to the next government to take the necessary efforts to meet its adjustment path.

Belgium and Portugal, also with caretaker governments, were told also to submit an updated budgetary plan as soon as new governments are in place.

Spain agreed with Brussels to cut its deficit to 1.1% of GDP next year and reduce its structural deficit by 0.65% of its GDP (€7.8 billion).

Spain’s acting minister of Economy, Nadia Calviño, met with outgoing Commissioner for Economy, Pierre Moscovici, and with his likely successor, Commissioner-designate Paolo Gentiloni, two weeks ago to discuss the political situation in Spain and the budgetary issue.

Calviño told reporters that she did not notice “any concern” when she explained the situation. She promised that the country would make every possible effort to meet its structural balance targets next year.

[Edited by Sam Morgan]

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