Five takeaways from the EU’s economic recommendations to member states

Commission Vice-President for Financial Services and Capital Markets Union, Valdis Dombrovskis, Commissioner for Employment, Social Affairs, Skills and Labour Mobility Marianne Thyssen and Commissioner for Economic and Financial Affairs, Taxation and Customs Pierre Moscovici, give a press conference on the European Semester Spring 2019 package at the European Commission in Brussels, Belgium, 5 June 2019. The European Commission recommended disciplinary proceedings against Italy because the country was breaking fiscal rules over its rising public debt. [EPA-EFE/STEPHANIE LECOCQ]

While the public finances of all EU member states are now officially out of the “red zone”, the European Commission on Wednesday (5 June) still had tough economic policy recommendations for Spain, Italy, Belgium, Greece and Germany.

Spanish fiesta… for now. As expected, the Commission recommended closing the excessive deficit procedure against Spain. Member states should give their blessing to that recommendation in the coming weeks.

Once Spain exits, there will be no country left under the EU’s fiscal surveillance programme, down from 24 countries in 2011. 

The Spanish deficit ended below the 3% GDP threshold in 2018 (2.5%) and will remain under that limit this year and next. 

“This is the end of the excessive deficit procedure cycle that started with the crisis,” said Pierre Moscovici, the EU’s Economic Affairs Commissioner.

Although the decision “marks the end of a difficult road,” problems remain for the Iberian economy, the French commissioner added.

Chief among them is the high level of unemployment in the country, the widespread use of temporary contracts, and the high volume of public debt.

Slowing growth: EU countries urged to further adjust spending

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.

In this regard, Spain still faces na uphill battle in balancing its public accounts. The country holds the largest structural deficit of the eurozone (3% of GDP, or around €36 billion). But Madrid made no structural effort to reduce it since 2017. 

In order to address this issue, the Commission vice-president for the euro, Valdis Dombrovskis, said Spain should implement a structural effort worth 0.65% of its GDP (around €7.8 billions) in 2019 and in 2020, either by raising taxes or cutting expenditure. 

However, the Stability programme submitted by Madrid posed the risk of a “significant deviation” from this objective, he warned.

Italian drama. After assessing Italy’s efforts to reduce its high public debt (around 132% of GDP), the Commission concluded that the government failed to do the required efforts. 

As a result, it is “warranted” to launch an excessive deficit procedure based on the debt criterion of the Stability and Growth Programme, said Dombrovskis. 

Member states should decide now whether they approve this recommendation in the next weeks. The procedure could lead to a €3.5 billion fine for Rome (0.2% of Italian GDP).

The situation only got worse since last December, when the EU executive forgave the sanction procedure against Rome. But quoting Edith Piaf, Moscovici said “Je ne regrette rien”. 

The French Commissioner pointed out that Italy’s economic situation in December was quite different. Growth was expected to hit 1.1% this year, but in the end reached only 0.1%, a full point lower than predicted. Moreover, the decision taken at the time was ex-ante and based on draft fiscal plans, while now it is an ex-post verdict, based on the 2018 budgetary execution, Moscovici pointed out. 

Commission to launch sanction procedure against Italy

The European Commission is preparing to launch a new excessive deficit procedure against Italy as a response to the government’s lack of efforts to control public spending in the highly indebted EU country.

The Commission backed its decision with numerous figures, primarily the increasing pile of public debt (expected to surpass 135% of GDP next year), and deficit (3.5% of GDP in 2020).

Still, the Commission’s decision to launch an excessive deficit procedure was not a mechanic or legalistic response, but based on whether it helps to create room for growth and sound public finances, said Moscovici. 

“My door is open” he added, as he told reporters that he is ready to have a “factual discussion” with the Italian populist government on how the sanction procedure might be avoided.

Belgian doubts. Italy was not the only country under strict review. The Commission also prepared reports on France, Cyprus and Belgium to assess their efforts to balance their public accounts. 

But in contrast with Italy, the Commission said it did not find enough reasons to recommend a sanction procedure against any of these countries.

Belgium was the hardest call to make. As Moscovici admitted, the country represented a “borderline case”. Despite the high level of public debt (102% of its GDP), the country failed to make any structural effort to bring it down in 2018 and 2019.

However, the Commission did not find its analysis conclusive enough to take the country to the next step of the sanction procedure. 

It is the second consecutive year that the EU executive fails to take a decision about Belgium. In its report, the institution blamed “large uncertainties related to key factors of fiscal performance in 2017 and 2018,” especially whether the budgetary improvement was of structural nature. If those uncertainties were taken into account, the “significant deviation appears to be “very small,” the report reads.

Belgium's 'Black Sunday' sees far-right surge, threatens new government crisis

Extreme-right Flemish separatist party Vlaams Belang gained big in Belgium’s triple elections on Sunday (26 May), complicating efforts to form the next federal government as French-speaking Walloons voted for radically opposite parties on the left of the political spectrum.

The good piece of news for Belgium came as national parties struggled to forge a coalition following an inconclusive national election held on 26 May. 

The absence of an executive could help limit public expenditure, as it happened the last time the country was without a government for almost 20 months. But Belgian commissioner Marianne Thyssen, in charge of social affairs, said that “it is better to have a government that can take decisions.”

Greek slippage. After beating its fiscal targets over the past years, the leftist government led by Alexis Tsipras received a serious warning from the Commission due to the latest handouts announced in the run up to the snap elections next month. 

The verdict was part of the special post-programme surveillance.

Greece’s latest decisions don’t go “in the right policy direction,” Dombrovskis said. “It is important not to waste the efforts made over the past years,” he added, recalling that the country’s public debt currently amounts to 180% of GDP, most of which is owed to its European partners.

Moscovici also pointed to “delays” in implementing the cash-for-reform programme launched in 2010.

Growing concerns over Greece and Italy, as negotiations stall on eurozone budget

Latest Greece and Italy’s fiscal plans raised concerns in Brussels, as the Eurogroup met for another round of negotiations on the budgetary instrument for the Eurozone on Thursday (16 May), without major achievements.

Greece exited its bailout programme last August. But the announced tax cuts and the payouts for pensioners strained relations between Athens and its European creditors.

Dombrovskis said the package offered by Tsipras undoes part of the reform programme and “poses a risk to the achievement of the agreed primary surplus target of 3.5% of GDP for this year and beyond.”

As part of the bailout exit strategy, Greece agreed with its eurozone creditors to achieve a yearly primary budgetary surplus of 3.5% until 2022.

German money. The 2014-2019 mandate of this European Commission ends like it started: with a strong focus on investment. But while the main problem in 2014 was the low level of investment compared with pre-crisis volumes, now the priority is the quality of spending and better alignment between reforms and investment. 

In order to address these challenges, the Commission included investment recommendations for the first time in its economic package.

Another German budget without new debt

The German Bundestag adopted the national 2019 budget with the votes of the ‘Grand Coalition’ last Friday (23 November), with expenditure reaching a record €356 billion and a particular rise in defence spending. Nevertheless, Finance Minister Olaf Scholz has managed to avoid creating any new debt. EURACTIV Germany reports.

Germany, as always, represents a particular case. The rising German surplus reflects “a subdued level of domestic investment relative to savings in both the private and public sectors,” according to the Commission.

As a result, the number one recommendation for the largest eurozone economy is to increase private and public investment, especially at local and regional level, in areas such as education, innovation, broadband, sustainable transport and housing.

Despite an increase in public investment last year (7.7%), the Commission pointed out that the investment ratio remains below the eurozone average. The EU executive added that an important public investment backlog remains in infrastructure and education, and lamented that Germany did not take advantage of favourable financing conditions.

[Edited by Frédéric Simon]

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