EU economies need reform to avoid debt crisis replay

Olli Rehn 11 Jan 2012_picnik.jpg

Twelve European economies – including Britain, Italy and France – have deep weaknesses that are undermining growth and need to be tackled, the EU said on Tuesday as it stepped up its surveillance to avoid a repeat of the devastating debt crisis.

From a potential real estate bubble in Sweden to a sharp export downturn in Belgium, the European Commission pointed to what it considers major structural problems that leave 12 members of the 27-nation EU vulnerable to market attacks and global shocks.

"This is about tackling risky and harmful macroeconomic imbalances," said Olli Rehn, the EU's top economic official, as he made public the findings of the first alert mechanism report. "The procedure may look complicated but this is in the end a rather simple screening device."

The EU's executive will seek to look much more deeply into the economies of Belgium, Britain, Bulgaria, Cyprus, Denmark, Finland, France, Hungary, Italy, Slovenia, Spain and Sweden.

EU countries receiving financial aid – Greece, Romania, Portugal and Ireland – were not part of the surveillance exercise, which is a new tool that helps detect risky economic development.

A failure to follow EU recommendations on how to face up to housing bubbles, persistent deficits, a chronic lack of competitiveness and excessive private and public debt levels could lead to fines and, for poorer EU members, a freezing of EU structural funds for economic development.

With the eurozone's debt crisis in its third year, the Commission report echoes World Bank and International Monetary Fund warnings in recent weeks that the European Union, which generates around 22% of global output, risks economic stagnation if policymakers do not act.

The International Monetary Fund forecasts a 0.5% contraction for the euro zone in 2012 that the Washington-based lender says could drag the world into recession.

Germany not on the blacklist

In a sign the EU's economies are diverging, the region's biggest – Germany – was not on the Commission's blacklist. After a brief fall in exports at the end of 2011, many economists expect it to avoid recession in 2012.

But France, Britain, Italy and Spain, the EU's other large economies, need to reform, the EU said.

France, which lost its prized AAA sovereign debt rating in January, has recorded one of the sharpest losses of market share in world exports in the EU in recent years and rising wages have made it increasingly uncompetitive, the report said.

The Commission said Italy's public debt, equal to about 120% of GDP, was a concern given its track record of weak economic growth. Investors worried about Rome's ability to manage its debt pushed spreads between Italy's 10-year bonds and comparable German Bunds to record levels in November and forced Silvio Berlusconi out of power.

Rome remains in the front line of the eurozone debt crisis with Prime Minister Mario Monti struggling to convince markets he can reform the Italian economy.

For Britain, which is outside the eurozone, a loss of export market share over the past decade, high levels of household debt and rising house prices are an issue for Brussels.

Moody's cited Britain's "materially weaker" growth prospects over the coming years as it warned the nation's AAA rating risked being downgraded, but finance minister George Osborne said London would stick to its debt-cutting measures.

It also signalled it may cut the AAA ratings of France and Austria and downgraded six other European nations including Italy, Spain and Portugal, citing growing risks from the debt crisis.

"A correction is now under way … and the deleveraging process has began," the Commission said in reference to efforts to tackle debt as well as house prices across the bloc. "It is unclear how far it will go and for how long it will continue."

EU to punish Spain for deficits, inaction

Meanwhile, Reuters reported that Brussels might likely take action against Spain’s newly installed government by May for delaying austerity measures ahead of a regional election next month.

Three senior EU officials told Reuters that a final decision still has to be made, but the European Commission believes the new government overstated the deficit figures for 2011 so the current year's data would look better.

Spain is also not addressing quickly enough the deterioration in public finances expected in 2012, risking the country's longer-term growth, the officials said.

Asked if Rehn would take action and recommend that the bloc's 27 finance ministers adopt sanctions against Madrid, one of the officials said: "It is very likely."

Spain has been under what's known as an excessive deficit procedure since April 2009 for breaching the EU's 3% of GDP deficit limit. Twenty-three of the EU's 27 members are under the procedure but now Madrid could face fines of up to 0.1% of its economic output for not cutting its deficit.

Green economic affairs spokesperson Philippe Lamberts welcomed the alert mechanism report as an important tool that could "identify and respond to economic imbalances at EU-level" but criticised its "selective approach".

"While the Commission's scoreboard analysis does assess a much wider range of indicators than previously under the stability and growth pact, it ignores the elephant in the room: Germany. Germany's policy of wage deflation and persistent current account surplus are clear 'imbalances', which have damaging spill-over effects on other eurozone members, as well as for Germany's own workforce. To ignore this is blinkered."


The EU’s new rules on economic governance, the so-called "six-pack" has two legs: fiscal and macroeconomic surveillance.

The macroeconomic imbalances procedure is a new tool that helps detect and correct risky economic developments. Its first ever annual Alert Mechanism Report (AMR), adopted yesterday (14 February), kicks off the surveillance. 

Based on a scoreboard of 10 macroeconomic indicators, such as a loss of competitiveness, a high level of indebtedness or assets price bubbles and taking into account other economic data, the Alert Mechanism Report identifies member states whose macroeconomic situation needs to be scrutinised in more depth.

This is the starting point of the new Macroeconomic Imbalance Procedure (MIP) that will deepen the dialogue on economic policy making with EU countries. If necessary, the European Commission is supposed to issue a recommendation to the member state concerned to take appropriate action and correct imbalances from persisting.

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