Euro Capitals Tighten Fiscal Leash as EU Polices Cuts

Photographer: Alessia Pierdomenico/Bloomberg
Italy’s cabinet approved 3.5 billion euros of spending cuts on Oct. 15, having earlier identified savings of 500 million euros in property sales.

In Madrid, the government is paring spending on roads and rails. In Rome, state property is to be sold off. In The Hague, lawmakers agreed to the second set of extraordinary cuts in two years.

Even with the 17-nation euro area projecting economic expansion next year for the first time since 2011, policy makers are keeping a fiscal leash on growth by maintaining austerity policies born in the fight to save the euro.

That’s because for the first time officials in Brussels will get to review spending plans before they are approved by national parliaments. The European Commission, the European Union’s regulatory arm, was empowered to demand revisions in a bid to impose discipline and encourage coordination.

“The pressure to continue with austerity is unabated,” said Paul De Grauwe, a professor at the London School of Economics.

While there are no new penalties built into the system, the EU says that by pointing out flaws in the draft budgets that had to be submitted by Oct. 15, governments can mend their ways.

“Don’t underestimate the impact of the upcoming so-called two-pack,” EU President Herman Van Rompuy said on Oct. 2 in Brussels, referring to the two pieces of EU legislation that authorized the budget oversight. “It won’t make Brussels more popular in our capitals.”

Demands for rigor follow three years of euro-area cost-cutting that totaled 216.7 billion euros ($293 billion). That exceeds the size of the Greek economy.

Primary Surpluses

Cyclically adjusted primary-balance figures, a measure of fiscal health before interest expense that attempts to factor out economic swings, show the savings since 2010. The euro area moved from an average deficit of 2.3 percent of gross domestic product in 2010 to what the EU forecast in May will be a positive balance of 1.7 percent of GDP at the end of 2013.

In Ireland, the cyclically adjusted primary balance will have moved from a deficit of 25.4 percent of GDP in 2010 to a 2.3 percent deficit in 2013, according to the EU forecasts. Greece has seen a deficit of 2.6 percent in 2010 shift to a predicted 6.3 percent of GDP positive balance in 2013.

Still, following six quarters of contraction, the longest slump since the euro’s debut in 1999, the debt burden has only grown. As a percentage of GDP, debt has increased across the single currency region to an average of 92.2 percent after the first quarter of 2013 from 85.6 percent at the end of 2010.

Debt Loads

Even after the biggest sovereign restructuring ever, Greece’s load rose to 160.5 percent at the end of the first quarter of 2013 from 148.3 percent at the end of 2010. In the same period, Italy’s rose to 130.3 percent from 119.3 percent.

There has never been a penalty imposed on a country for exceeding the EU debt limit of 60 percent or its annual deficit ceiling of 3 percent.

“In case there is a deviation from the European commitments by a member state and the European Commission has to say ‘sorry guys, please revise your budgetary plan,’ most likely the market reaction will be quite negative,” Olli Rehn, the EU’s economic and monetary affairs commissioner, told a conference in Vilnius via video link yesterday. He said the goal of the commission was to provide policy advice during the planning process, not to “veto national budgets.”

The advice is being taken on board.

Going Dutch

In Spain’s draft budget, announced on Sept. 30, infrastructure spending will fall 8.6 percent next year, with investment in public works declining 17 percent. Italy’s cabinet approved 3.5 billion euros of spending cuts on Oct. 15, having earlier identified savings of 500 million euros in property sales. To ease the impact of austerity, the government says it will reduce the labor tax to give an extra 1.5 billion euros to workers and 1 billion euros to employers next year.

The main parties in the Netherlands, which is in its third recession since 2008, agreed to 6 billion euros of cuts on top of a 16 billion-euro four-year austerity package enacted in 2012.

With euro-area finance ministers meeting on Nov. 22 to discuss each other’s plans and the European Commission’s opinions on them issued a week earlier, the EU hopes that peer pressure will encourage governments to keep their houses in order.

“Peer pressure is only strong if the case is convincing,” Sven Giegold, a German member of the European Parliament’s economic and monetary affairs committee that helped shape the legislation, said in a telephone interview. He’s concerned that a lack of consistency in advice given to countries may undermine budget cops’ credibility.

Europe needs integration where competencies are national but not on an arbitrary basis,” Giegold said.

To contact the reporter on this story: Ian Wishart in Brussels at iwishart@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

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