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EU Criticizes Spending Plans of Biggest Euro-Area Nations

EU Criticizes Spending Plans of Four Biggest Euro-Area Nations
Olli Rehn, the European Union's economic and monetary affairs commissioner. Jock Fistick/Bloomberg

The European Union confronted the euro area’s biggest economies over their spending plans for next year as austerity demands restrain the bloc’s recovery from the longest recession in its history.

The EU said that Germany, Europe’s largest economy, has made “no progress” in following recommendations to spur domestic demand, that Spain’s budget risked missing deficit targets and that Italy’s 2014 plan was in danger of breaching debt-reduction rules.

The budget plans of euro-area countries “still do not pay sufficient attention” to fiscal consolidation, EU Economic and Monetary Affairs Commissioner Olli Rehn told reporters today in Brussels. “Continued progress with sound public finances should be supported by growth-friendly structural measures.”

The assessments reveal EU officials’ determination to ensure that governments do not become complacent following forecasts that the euro-area economy will grow next year for the first time since 2011. While the bloc came out of a recession with a 0.3 percent expansion in the second quarter, growth slowed to 0.1 percent in the three months through September, with France’s gross domestic product shrinking and Germany’s economy slowing, data showed yesterday.

‘Turning Up’

The EU is “turning up the heat” because it is worried about the pace of reform around the euro area, and particulary in Italy and France, said Nicholas Spiro, managing director of Spiro Sovereign Strategy in London. “Until such time as the euro zone moves from this shaky, insecure, ill-managed monetary union to a more secure and much more integrated political, economic and banking union, it will lurch from one crisis to the next,” he said.

Germany, the fiercest defender of the austerity-led response to the sovereign-debt crisis, came in for criticism two days after the European Commission opened an in-depth probe into German current-account surpluses. While the German budget meets the debt and deficit rules, the EU reiterated its concern that the nation’s trade surplus is hindering other euro-area economies.

“Our recommendation obviously to Germany is please implement or decide on these kind of economic reforms that would further reinforce domestic demand” and boost public and private investment, Rehn said. “We have recommended to Germany to address this for the sake of the Germans themselves and the euro zone in its entirety,” he said.

‘No Progress’

Germany has made “no progress” in addressing the structural part of fiscal recommendations the EU issued earlier this year, the commission said in a statement. “As soon as a new federal government takes office, national authorities are encouraged to submit an updated draft budgetary plan.”

The EU said Germany should make public spending on health care and long-term care more cost effective, improve the efficiency of the tax system, spend more on education and research, and reduce high taxes and social security contributions, especially for low-wage earners.

German Chancellor Angela Merkel’s Christian Democratic bloc is in talks with the Social Democrats to form a so-called grand coalition government, almost two months after Merkel’s party won the largest vote share in parliamentary elections.

Today’s warnings represent the first use of new powers that governments have given the European Commission to review nations’ budget plans before they go to national parliaments. While countries are under no obligation to heed the advice, the opinions are intended to warn governments to remain committed to policies to cut debt and deficits as the euro area tries to shake off the legacy of the turmoil.

Deficit Target

With unemployment at a record 12.2 percent and inflation at its lowest level in four years, the EU is eager that governments do not waver in their efforts to boost growth. Euro-area finance ministers will meet in Brussels to discuss the commission opinions on Nov. 22.

The commission said that, while Spain had taken effective action in reducing its deficit in 2013, the draft budget for next year is “at risk of non-compliance” with EU rules “as the headline deficit target may be missed and the recommended improvement in the structural balance is currently not expected to be delivered.”

There is “a risk that the adjustment envisaged in the budgetary plan may fall short,” Rehn told reporters. “This risk arose from somewhat favorable growth assumptions.”

‘Not Respected’

The Spanish government, led by Prime Minister Mariano Rajoy, is targeting a deficit of 5.8 percent of GDP next year. The commission forecasts it to be 6.5 percent this year, down from 10.6 percent in 2012, which was the widest in the EU.

The commission said the draft budget for Italy, which has the second-highest debt level in the euro area after Greece, was at risk of breaching EU rules. “In particular, the debt-reduction benchmark in 2014 is not respected,” it said.

Italy’s budget foresees a labor-tax cut and 3.5 billion euros of spending reductions as it tries to reduce its budget deficit from a predicted 3 percent of GDP this year to 2.5 percent in 2014.

The commission said the French and Dutch draft 2014 budgets were compliant with the EU’s debt and deficit rules, “albeit with no margin” for slippage. With the Netherlands expected to fail to reduce its deficit below the EU’s 3 percent ceiling next year, “the risks identified warrant close monitoring,” the commission said.

Dutch Finance Minister Jeroen Dijsselbloem said the recovery “remains very fragile” across the euro area.

Effective Action

“We need to look very carefully that all targets are met,” Dijsselbloem said in an interview in Brussels, where he led a meeting of euro-area finance chiefs. “That applies to the Netherlands and to all other countries.”

The commission said France appeared to be taking “effective action” for 2014, which French Finance Minister Pierre Moscovici called “reason for satisfaction.”

The EU “has shown that the French budget is legitimate, is serious,” Moscovici told reporters in Brussels. He said it showed the efforts being made by the French population “are not in vain.”

Finland, Luxembourg and Malta are at risk of breaching the EU’s debt and deficit rules, the EU said. Poland has “not taken effective action” to reduce its deficit, according to the report.

The commission said that it would recommend putting Croatia, which joined the EU on July 1, in the bloc’s excessive deficit procedure because its budget shortfall is projected to stay well above 3 percent through 2015, while public debt is projected to exceed 60 percent of GDP in 2014.

The four euro-area countries that received have full bailouts -- Greece, Ireland, Portugal and Cyprus -- did not have their draft budgets scrutinized under the new rules.

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