Wednesday, March 17, 2010

EU’s largest economies warned on forecasts

EU’s largest economies warned on forecasts
By Tony Barber in Brussels

Published: March 17 2010 15:23 | Last updated: March 17 2010 22:44

The European Commission on Wednesday warned the eurozone’s four largest countries – Germany, France, Italy and Spain – that their economic growth forecasts for the next three years were too optimistic, putting at risk their ability to cut their budget deficits in accordance with the European Union’s fiscal rules.

The Commission asked these four countries, and others including Austria, Belgium, Ireland and the Netherlands, to spell out exactly how they intended to meet their medium-term deficit reduction targets of 3 per cent or less of gross domestic product – the EU’s ceiling in normal economic times.

Britain has been warned that its plans to cut its deficit, which is estimated to be £178bn this financial year, were too timid. The Commission wants headline borrowing – currently more than 12 per cent of national output – to fall within the rules of the EU’s stability and growth pact to a level of 3 per cent by 2014-15.

The Commission delivered its warning two days after eurozone finance ministers broke fresh ground by declaring that they were ready to set up a standby lending facility for Greece to help it overcome its sovereign debt crisis.

No other eurozone countries are regarded as in such dire circumstances as Greece, but most are struggling with booming budget deficits and public debts that, in the Commission’s view, have wiped out the benefits of roughly 20 years of fiscal prudence in the EU.

European governments have agreed that emergency fiscal stimulus programmes introduced in late 2008 to fight the most severe recession in EU history should be gradually withdrawn from next year.

But the Commission remains concerned about how quickly national budget deficits will shrink at a time when global interest rates are likely to go up, putting pressure on the capacity of governments to fund their debts.

“The main risks to consolidation stem from somewhat optimistic macroeconomic assumptions and the lack of specification of consolidating measures,” Olli Rehn, the EU monetary affairs commissioner, said in a statement.

The Commission, which is the guardian of the EU’s fiscal rulebook, known as the stability and growth pact, based its assessments on economic programmes up to 2012 or 2013 that were submitted by individual EU governments.

It said Spain’s prediction that it would be able to slash its budget deficit to 3 per cent of GDP in 2013 from 11.4 per cent this year was based on markedly optimistic growth forecasts of 1.8 per cent next year, 2.9 per cent in 2012 and 3.1 per cent in 2013.

The Commission also pointed to the slow pace of public sector bank restructuring in Spain, suggesting that this might act as a brake on growth. It said Spain should take action to improve the long-term sustainability of its public finances, notably by means of a pensions system reform.

Italy, which has the eurozone’s second highest public debt after Greece, was asked by the Commission to reform its national budgetary procedures and to control regional spending. It was told that its forecasts of a 2.7 per cent deficit in 2012 and a debt of 114.6 per cent might not be fulfilled, because the underlying economic projections were too favourable.

The Commission made much the same point about France, saying the government’s forecasts of 2.5 per cent annual growth in 2011, 2012 and 2013 were “rather optimistic ... The strategy does not leave any safety margin if economic developments turn out worse than projected.”

Even Germany, the eurozone’s chief advocate of fiscal rigour, was told that it was at risk of missing its deficit reduction target because the ruling centre-right coalition had not yet explained how it planned to reconcile fiscal austerity with tax cuts.

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