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In First Economic Review, Italy and Spain Get Warnings In First Economic Review, Italy and Spain Get Warnings
(about 5 hours later)
BRUSSELS — The top European economics official warned Italy and Spain on Friday that they risked missing important debt and deficit targets in what was the first review of national budget plans for 13 countries in the euro zone. BRUSSELS — The top European economics official warned Italy and Spain on Friday that they risked missing important debt and deficit targets in the first review ever of national budget plans for 13 countries in the euro zone.
The announcement, by Olli Rehn, the European Union’s commissioner for economics and monetary policy, is aimed at keeping tighter reins on national finances to stave off the kind of overspending that fed a crisis that nearly destroyed the euro. The announcement, by Olli Rehn, the European Union’s commissioner for economics and monetary policy, is aimed at keeping tighter reins on national finances to stave off the kind of financial problems that fed a crisis that nearly destroyed the euro.
The reviews are a new attempt by the European Commission, the executive arm of the European Union, to enforce rules on deficits that were flouted during the past decade by major states including Germany. That was widely seen as setting a bad example to countries like Greece with far more vulnerable economies. The reviews, conducted before budgets are approved by national parliaments, represent a change in the way the euro area is governed and a new attempt by the European Commission, which is the executive arm of the European Union, to enforce rules on deficits that were flouted during the past decade by major states, including Germany. That was widely seen as setting a bad example to countries like Greece with far more vulnerable economies.
“We have reached a turning point on the road to economic recovery, and today we reach a milestone in the implementation of Europe’s strengthened economic governance,” Mr. Rehn said in a statement. “Member states have given the commission the responsibility to issue these opinions, and I trust that they will thus be taken on board by national decision-makers.” “Member states have given the commission the responsibility to issue these opinions, and I trust that they will thus be taken on board by national decision-makers,” Mr. Rehn said at a news conference here. He called the reviews “a milestone in the implementation of Europe’s strengthened economic governance.”
The commission judged that the Italian draft budget “demonstrates limited progress” in meeting its earlier recommendations, and it warned that Italy might not hit its benchmark for reducing debt next year. The commission also ruled out giving Italy some extra leeway, because it “would not make the minimum structural adjustment” related to other economic indicators. The commission did not invoke its powers to require Italy, Spain or any other country to revise their budget plans, and Mr. Rehn characterized the verdicts announced on Friday as “much more about partnership than penalties” in terms of their effect on member states.
In the case of Spain, the commission said its draft budget for 2014 was “at risk of noncompliance” because “the headline deficit target may be missed and the recommended improvement in the structural balance is currently not expected to be delivered.” The announcement on Friday appeared most serious for Italy. Mr. Rehn decided not to give the country an exemption to spend billions of euros already included in its budget for next year. That represents a setback for the government of Prime Minister Enrico Letta, who won a confidence motion early last month, but whose grip on power remains fragile, and it could strengthen the hand of lawmakers allied with the former prime minister Silvio Berlusconi.
The French plan was “compliant with the rules of the Stability and Growth Pact, albeit with no margin,” the commission said. The Netherlands received a similar warning. Mr. Rehn played down concerns that his verdict could further jeopardize stability in Italy.
Even so, the commission did not invoke its powers to require Italy, Spain or any other country to revise their budget plans. “Every day this year at least has been a politically sensitive moment for Italy, like often in the previous years,” said Mr. Rehn. “So we just have to do our job and we have presented our views as regards whether Italy is practicing what it preaches and ensuring that its public finances are on a sustainable path.”
Under a separate procedure, the commission told Belgium, Spain, France, Malta, the Netherlands, Poland and Slovenia to correct excessive deficits. The commission judged that the draft budget for Italy, which has the third largest economy in the euro area, “demonstrates limited progress” in meeting its earlier recommendations and he warned that the country might not hit its benchmark for reducing debt next year.
The power that the European Commission now wields over national budgets is significant. Member states must send their draft budget plans to Brussels at the same time they send them to national parliaments. This year that deadline was Oct. 15. European Union rules require all member states to bring their deficits down to 3 percent and their debt down to 60 percent of gross domestic product. But according to a Nov. 5 forecast by the commission, Italy’s debt is projected to rise to 134 percent of G.D.P. next year from 133 percent this year, although its deficit is projected to fall to 2.7 percent next year from 3 percent this year.
But the verdicts issued on Friday, and other opinions issued earlier this week by the authorities in Brussels, showed little appetite for a full-blown fight with member states. Instead, the political priority appears to be to put more to focus on good news at a time when there are fears that optimism about a recovery from the crisis may be premature. The verdict drew a sharp reaction from the Italian Ministry of Economy and Finance, which said the commission did “not take into account important measures.” The country’s finance minister, Fabrizio Saccomani, insisted that it was “not necessary to change the budget.”
On Wednesday, Mr. Rehn warned 16 member countries to address problems with their economies. Germany’s trade surplus and France’s public spending were singled out as problem areas. In theory, countries that do not meet their goals could eventually be fined. But in practice, in that case, the commission has already decided to shy away from full-blown confrontations with member states by making the exercise more of an advisory one. In the case of Spain, the draft budget for 2014 was “at risk of noncompliance” because “the headline deficit target may be missed and the recommended improvement in the structural balance is currently not expected to be delivered,” the commission said. The Nov. 5 forecasts by the commission projected a Spanish deficit of 5.9 percent next year, rising to 6.6 percent in 2015.
The French plan was “compliant with the rules of the Stability and Growth Pact, albeit with no margin,” the commission said. The Netherlands received a similar warning, while Germany was told it had not made progress on reforms like lifting domestic demand.
As part of a related procedure, the commission told Belgium, Spain, France, Malta, the Netherlands, Poland and Slovenia to correct their excessive deficits. If those countries continued to violate limits, the commission could eventually recommend financial penalties of up to 0.2 percent of G.D.P.
Even though Mr. Rehn was not proposing penalties for the errant budgets, some analysts said his policy recommendations were tougher than they expected and said they implied more belt-tightening in countries already weary of austerity policies.
The commission “has surprised us with the degree of criticism it has directed toward the budgetary drafts, with widespread criticism that the amount of fiscal consolidation is not ambitious enough over the next couple of years,” Malcolm Barr, an economist at JPMorgan in London, wrote in a client note on Friday.
Four euro-area countries in bailout programs — Ireland, Portugal, Greece and Cyprus — were not included in the report because they are already under enhanced surveillance.
In a busy day for economic policy making in Brussels, finance ministers from the Union’s 28 member states meeting here reached agreement on how to help banks that are deemed short of capital as a result of a review next year by the European Central Bank. That review of about 130 of the zone’s largest lenders is aimed at determining if banks have any hidden problems and need to be recapitalized or shut down.
Under an accord reached Friday, the ministers made clear that creditors of failing banks will have to suffer and that national funds must be used before a country is permitted to apply for European funds as a last resort.
But ministers made less progress in discussions on creating an agency that could make decisions about when to restructure failing banks. Countries must overcome deep differences on the structure and responsibilities of a so-called Single Resolution Mechanism, which European finance ministers have said they want in place by the end of the year.