EU Warns of Contagion From France, Italy Economic Weaknesses

  • `Excessive imbalances' in second-, third-largest euro states
  • Countries must reduce level of public debt, EU Commission says

The European Commission warned France and Italy that weaknesses in their economies risk triggering a new wave of contagion to other countries as it placed the two nations in its most severe category for economic imbalances.

The euro bloc’s second- and third-largest economies, as well as Portugal and two non-euro countries -- Bulgaria and Hungary -- have “excessive imbalances,” the European Union’s executive arm said on Tuesday. The EU said it will escalate its policing of these countries’ spending policies as it warned of rising levels of public debt.

“The main reasons for concern are the persistence of high levels of indebtedness, be it public, private or external, vulnerabilities in the financial sector and/or deteriorating competitiveness,” European Commission Vice President Valdis Dombrovskis told reporters in Strasbourg, France.

With the EU forecasting growth in its 28 member countries to be 1.9 percent of gross domestic product this year and unemployment at 9 percent, policy makers are still grappling with how to eliminate weaknesses from the euro region’s largest economies.

Public Debt

“The recovery in the EU remains slow and fragile, highlighting the need to step up structural reforms, encourage investment and build a more competitive economy,” the Brussels-based commission said in a report accompanying the decision. “The recovery is weak, both in historical perspective and compared to other advanced economies.”

In the report, the commission criticized Francois Hollande’s France for increasing public debt, coupled with worsening productivity growth and competitiveness. It says that this could have an impact on other nations.

Neighboring Italy has a debt-to GDP ratio that’s the second largest in the euro area after Greece. That and “protracted weak productivity” in Prime Minister Matteo Renzi’s economy could spill over to other nations, the commission said.

The EU stepped up its policing of national budgets in the wake of the turmoil that Greece’s debt ignited across the euro area in 2010. While the EU hasn’t yet fined any nation for economic waywardness, the threat of sanctions and its persistent monitoring is supposed to alert governments of trouble ahead.

Commission officials will discuss the economic weaknesses with government representatives over the next two months. While they have no power to demand changes to countries’ budgets, they will produce a set of recommendations for each country in May.

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