Deficit Worries Weigh Before EU Summit

Just days before EU leaders meet in Brussels to discuss measures to increase the region's competitiveness, market concerns over public finances continue to rattle national governments and hog the media limelight.

Spain continued its public relations offensive on Monday (8 February), after concerns over Greece's deficit and debt levels recently spread to the Iberian state and its neighbour, Portugal.

The country's finance minister, Elena Salgado, together with her deputy, Jose Manuel Campa, flew to London to meet bondholders and outline recently announced austerity measures.

Repeating promises to cut its budget deficit to 3 per cent of gross domestic product by 2013 from 11.4 per cent last year, Mr Campa insisted the government would "make the adjustment that's necessary."

But their disclosure that the Spanish treasury intends to raise €76.8 billion through debt issuance this year lead to renewed market doubts, sending the country's bond yields higher.

Writing last week in the New York Times, Nobel prize winning economist Paul Krugman said Spain's difficulties were an "an object lesson in the problems of having monetary union without fiscal and labour market integration."

After a decade-long boom, the 2008 implosion of Spain's housing bubble has left the country with excessive labour costs, spiraling unemployment and a large budget deficit. "If Spain had its own currency, this would be a good time to devalue; but it doesn't," said Mr Krugman.

Single currency

The eurozone deficit crisis has also taken its toll on the area's common currency. Last Friday the euro plunged to an eight-month low of $1.3583, recovering slightly on Monday.

Markets are also increasingly gambling against the single currency. Driven by fears of a eurozone debt crisis, traders and hedge funds have bet nearly $8bn (€5.9bn) on a falling euro, reports the Financial Times.

Credit ratings agency Fitch insisted on Monday however that other eurozone countries face no risk of "contagion" from the debt and deficit crises afflicting Greece, Portugal and Spain.

The agency's chairman, Marc Ladreit de Lacharriere, told French radio that France and Germany still enjoy sufficient "credibility" with investors "who are the deciders and the masters of the game."

Some analysts argue that fiscal problems in the euro area peripheral states are affecting core members such as France, however. In Nicolas Sarkozy's centre-right UMP party, calls are increasing to adopt a German-style medium-term budgetary balance law. "We can no longer spend as we did in the past," Xavier Bertrand, UMP leader, said over the weekend.

And as EU leaders prepare to meet for an informal summit in Brussels this week to discuss ways to increase the bloc's competitiveness, the issue of deficits is slowly edging its way onto the agenda.

With a new long-term economic strategy still the main topic for discussion, EU president Herman Van Rompuy conceded in a recent letter to leaders that "some aspects of the present economic situation" will also need to be looked at.

    Before it's here, it's on the Bloomberg Terminal. LEARN MORE