Germany, Italy and others warned on budget discipline

euro2.jpg

The European Union’s executive launched disciplinary action on Wednesday (7 October) against Germany, Italy and seven other countries for letting their budget deficits rise above the bloc’s permitted ceiling. But actual measures are not foreseen until recovery has taken hold.

Such moves are required under EU law when countries go over the limit, but the European Commission has said it will refrain from telling most of them to rein in their deficits until economic recovery takes root and member states agree on strategies to remove fiscal stimuli boosting their economies.

“We need to continue supporting the economy until the recovery takes hold, in line with the European Economic Recovery Plan,” EU Monetary Affairs Commissioner Joaquin Almunia said in a statement.

The EU’s excessive deficit procedure can in theory lead to fines for eurozone countries that persistently top the Union’s budget deficit ceiling of 3% of gross domestic product, or a freeze in EU aid funds for EU members not using the euro.

The Commission took the step in the procedure on Wednesday against Austria, Belgium, the Czech Republic, Germany, Italy, the Netherlands, Portugal, Slovakia and Slovenia. 

The deficits are rising because of the worst economic recession since World War Two, which is cutting state revenues while growth-boosting measures are emptying their coffers.

Another 11 of the EU’s 27 member states countries are already subject to the discipline action under the bloc’s Stability and Growth Pact, which is meant to underpin the euro currency.

Under the pact, the Commission recommends deadlines for cutting the deficits below 3% of GDP and the required annual fiscal correction, proposals that need to be approved by EU finance ministers.

Almunia said the pact was flexible enough to allow for the stimulus measures that are now in place but the Commission would seek to enforce fiscal discipline when the crisis was over. “It is essential to keep applying it rigorously in order to anchor expectations that the excessive deficits will be corrected in an orderly way,” he said.

Among the countries already facing disciplinary procedures, Ireland has until 2013 to correct its deficit, France, Poland and Spain until 2012, and Hungary, Lithuania and Romania until 2011. Greece should do it by the end of next year.

Deadlines for the current batch of budget sinners are expected to be set in November. But Commission officials and diplomats said privately those deadlines would be extended if the crisis lasted longer than expected.

The Commission praised Germany, the euro zone’s biggest economy, for taking advantage of good economic times in 2006-08 to cut its budget deficit to 0.1% of GDP last year.

This was in contrast to many other countries such as France and Poland, which failed to consolidate public finances despite economic expansion and will now run wide deficits.

The Germany fiscal shortfall is still forecast to grow to 5.9% of GDP in 2010 from this year’s expected 3.9%, the Commission said.

Call for greater macroeconomic coordination

Meanwhile, the European Commission called for greater macroeconomic coordination in the euro area in order to steer the EU out of the crisis. It underlined that the euro “acted as a crucial shield” against the crisis but that it “also shows the importance to address competitiveness divergences as a matter of common interest”.

“The launch of a new framework for growth decided by the G20 leaders in Pittsburgh raises the stakes for the euro area to speak effectively with a single voice to ensure that its interests are duly defended at the global level,” said Almunia.

(EURACTIV with Reuters.)

EU countries were offered "temporary" flexibility to deviate from the Union's strict budget deficit rules in 2009-2010 under an "economic recovery plan" presented by the European Commission in November last year (EURACTIV 27/11/08).

"In particular, periods longer than usual to bring the deficit back under the 3% ceiling will be considered," the Commission said.

Commission President José Manuel Barroso warned about disproportionate use of the flexibility, saying it would result in "a downward spiral of debt" that would only jeopardise growth in the future. The pact is "part of the solution, not part of the problem," he stressed.

Subscribe to our newsletters

Subscribe