EU Must Refrain From Easing Budget Rules, Estonia's Roivas Says

The European Union must refrain from easing budget rules to avoid sparking another crisis, Estonian Prime Minister Taavi Roivas said.

There’s growing concern in the trading bloc that some countries are pushing to relax fiscal regulations even as the EU’s economy “continues to have problems,” Roivas, who replaced Andrus Ansip as the euro-area nation’s premier in March, said yesterday in an interview in Tallinn, the capital.

“As soon as there are new suggestions of relaxing deficit rules, the crisis could be back,” said Roivas, 34. “I don’t believe this would have a happy ending.”

The euro-area economy, which exited a recession almost a year ago, may expand 1.2 percent this year, according to the European Commission, the EU’s executive arm. The commission warned this week against flouting German-inspired budget rules tightened in the wake of the debt crisis.

France won’t get an extension to bring its fiscal deficit under the threshold of 3 percent of gross domestic product, the commission said June 2, having a year ago granted the euro area’s second-largest economy two more years, until 2015, to reach that target. It also refused to give Italy any leeway in meeting debt-reduction targets.

‘Stagnant’ Economy

Italian Prime Minister Matteo Renzi, whose party last month achieved the country’s biggest electoral victory in more than half a century, has been pushing for the EU to allow a more expansive economic policy to favor employment and growth.

“I don’t believe that you can borrow another 4 percent of GDP a year when your economy is stagnant, your debt burden is about 100 percent of gross domestic product and you have to pay 1,500 euros per capita as interest each year,” Roivas said.

Estonia, which in 2011 became the first former Soviet republic to adopt the euro, has the EU’s lowest debt-to-GDP ratio, at 10 percent last year. It targets a budget deficit of 0.4 percent of GDP this year after a shortfall of 0.2 percent in 2012 and 2013.

Estonia must target higher living standards by increasing efficiency, Roivas said. Further cuts in labor taxes are needed in addition to those already agreed by the coalition of his Reform Party and the Social Democrats, which also seeks to tax more vices, like alcohol and tobacco, he said.

Recession Call

Even so, the economy probably entered a recession in the second quarter as exports to neighboring Nordic nations and Russia aren’t recovering, the local unit of Swedbank AB (SWEDA) said this week. With the EU’s fastest wage growth of 7.7 percent in the fourth quarter the labor market may be overheating, the International Monetary Fund said last month.

Tax revenue through the end of last month exceeded plans by 0.3 percent of GDP, suggesting “no need to become depressed” about the economy contracting in the first quarter, Roivas said.

Rising defense spending will be an additional burden on Estonia’s economy this year, “somewhat” exceeding the 2 percent of GDP target agreed on by members of the North Atlantic Treaty Organization. The country, which has a 294-kilometer (183 miles) border with Russia, is stepping up security investments and will host more NATO troops and aircraft because of the crisis in Ukraine.

The cabinet today approved speeding up plans to buy anti-tank rockets from the U.S., authorizing Defense Minister Sven Mikser to hold talks to purchase the missile systems “in a somewhat bigger scope and on a quicker timetable than initially planned,” the government press office said by e-mail.

To contact the reporter on this story: Ott Ummelas in Tallinn at oummelas@bloomberg.net

To contact the editors responsible for this story: Balazs Penz at bpenz@bloomberg.net Andrew Langley, Andrea Dudik

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