Slowing growth: EU countries urged to further adjust spending

EU commissioner for Economic Affairs, Pierre Moscovici, during the press conference following the publication of the economic forecast, on 7 May. [European Commission]

The European Commission called on Spain, Italy, France and Belgium to do more efforts to balance their public accounts yesterday (7 May), citing a slowing economy.

Bad news for the European economy again. The eurozone will grow less than initially expected this year, the Commission said on Tuesday (7 May).

According to the Commission’s spring economic forecast, the euro area will grow at a moderate pace of 1.2% in 2019, down from 1.3% projected in February.

The Commission also cut its GDP forecast for the EU to 1.4% this year, down by 0.1%.

For next year, output is projected to increase by 1.5% in the eurozone and 1.6% in the EU as a whole.

Uncertainty dampens European growth

Euro area economy is expected to slow down more markedly than initially expected, because of the impact of increasing risks, including a disorderly Brexit, and external tensions primarily driven by the US-China trade war.

After years of austerity, public spending is on the rise. Public deficits increased in the eurozone as a whole from 0.5% last year, the lowest figure since 2000, to 0.9%.

In the case of Belgium, Spain, France and Italy, the loosening stance is somehow worrying for the EU executive, given the structural mismatch between expenditures and revenues and the already high level of public debt.

The Commission broke its usual stance of waiting until June to issue its recommendations and included a straightforward message in its spring forecast to the governments concerned.

Spain, Italy, France and Belgium “are set to run sizeable structural deficits in 2019 combined with debt levels close to or above 100% of GDP, suggesting that further fiscal adjustment is needed.”

The European Commission’s fresh call for further adjustments in some of the EU’s largest economies comes just two weeks before European elections scheduled on 23-26 May.

Widespread voter dissatisfaction with austerity policies adopted in the wake of the 2008 financial crisis has already pushed populist parties to power across Europe, most notably the Five Star Movement and the far-right in Italy.

Italian headache

Italy is a particular headache for Brussels. It has the highest level of public debt among the vulnerable economies of Europe (135.2% of GDP expected in 2020), and the current government is largely ignoring calls from Brussels to get its expenditure under control.

Italian GDP is projected to register a meager 0.1% growth in 2019, and 0.7% in 2020, according to the Commission’s spring economic forecast.

Meanwhile, the fiscal stimulus put forward by the national-populist government in Rome is expected to push deficits above the 3% threshold again in 2020. The Commission now expects the Italian deficit to reach 3.5% of GDP next year, compared to 3.1% projected in November.

EU freezes budget disciplinary procedure against Italy

The solution offered to the European Commission is not ‘ideal’ but Italy’s efforts are sufficient to avoid the launch of the excessive deficit procedure, the EU executive announced on Wednesday (19 December).

The compromise reached between Rome and Brussels last December failed to rein in deficits in the eurozone’s third largest economy. Deficits were fuelled by the deteriorating economic environment and additional spending announced by Rome, including a new citizens’ income and a review of the country’s pension reform.

Italy’s fresh deviation from EU fiscal rules will fuel criticism from countries like The Netherlands, who say the Commission is too soft with the Italian government led by the populist Five Star Movement and the far-right Lega.

Pierre Moscovici, the EU Commissioner for Economic and Financial Affairs, refused to say whether the deteriorating figures would trigger an EU sanctions procedure against Italy. The Commission will assess Italy’s compliance with EU rules at the beginning of June, he indicated.

Spain’s €36 billion hole

But the country with the largest structural deficit in the eurozone is not Italy but Spain. The fourth largest euro area economy is currently spending almost 3% of its GDP (around €36 billion) more than it gets in revenue, excluding the economic cycle.

The Socialist government led by Pedro Sanchez, who won national elections on 28 April, passed additional expenditure measures, including a pay rise for civil servants and new social policy measures.

The Iberian economy is reducing its deficit however, thanks to a robust growth rate of 2.1% this year, the highest among the large EU economies, together with Poland.

In its Stability and Reform programme submitted to Brussels last week, Spain included a tax hike to generate additional revenues worth 1.6% of GDP (around €20 billion).

Moscovici did not comment on whether these new measures would be sufficient to satisfy the Commission’s call for further efforts.

Like for Italy, he postponed his verdict to June, by which time Sánchez may have concluded his attempt to form a new government.

In Spain, Socialists pledge ‘pro-European government’ after election win

Spanish Prime Minister Pedro Sanchez looks set to regain power after his Socialists overcame a historic challenge by right-wing nationalists in elections on Sunday (28 April), a result he portrayed as a morale booster for the European Union.

The Socialists gained …

While Italy, Spain, France and Belgium were urged to cut expenditure, Moscovici called on healthier EU economies to provide “more support to the economy”, in addition to new reforms to bolster economic output. This is the case in particular of Germany, the Netherlands and Finland, which have sufficient “fiscal space” to increase spending, the Commission says.

Risks and uncertainty

Despite the worsening economic climate, Moscovici showed some optimism, saying the European economy will continue to grow this year and next.

“The European economy is holding up in the face of less favourable global circumstances and persistent uncertainty,” the Frenchman said.

But the situation could continue to worsen, amid continuous trade tensions stoked by US President Donald Trump.

Among the chief risk factors for the next two years, the Commission listed protectionist measures and the slowdown of the global economy, especially if trade disruptions continue.

Brexit uncertainty weighs on eurozone growth, Draghi warns

ECB President Mario Draghi warned on Wednesday (10 April) that the uncertainty around Brexit was weighing on the eurozone’s growth but said he was still “hopeful” that major disruptions could be averted.

In addition, Commission vice-president for the euro, Valdis Dombrovskis said that “in Europe, we should stay alert to a possible ‘no-deal Brexit’, political uncertainty and a possible return of the sovereign-bank loop.”

The significant slowdown of Germany, the largest European economy, partly explained the downward revision of the European growth.

The German economy is now expected to grow at 0.5% this year, compared with 1.1% predicted in February, and 1.8% forecasted in November.

The main reason is the fall on the German exports, in particular cars to China.

Still, the EU executive expects German GDP to expand further in 2020, growing by an expected 1.5%.

[Edited by Frédéric Simon]

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