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11th Nov 2019

EU gives Spain more time, nudges France on deficit

  • Olli Rehn says the commission is not becoming more 'lenient' on deficit sinners (Photo: consilium.europa.eu)

The EU commission has opened the door for Spain to get an extra year in meeting its deficit target, while nudging France not to abandon its own budget tightening measures under the new Socialist president.

"We are ready to consider proposing an extension of the deadline for Spain to meet its deficit target by one year, to 2014," economics commissioner Olli Rehn said during a press conference on Wednesday (30 May) while presenting in-depth reports on how each member state is managing its finances and economic reforms.

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He added that two conditions had to be met for this to happen: Madrid needs to submit by July a "solid" plan for 2013-2014 explaining what they will do to reach the three-percent deficit target in 2014, down from almost nine percent last year.

The other condition is for Spain to "effectively control excessive spending at regional level."

As for Spain's recent bail-out of Bankia, the fourth-largest lender in the country, Rehn reminded Spain that eurozone's bail-out fund rules require banks not to pay out bonuses or dividends during the period in which they are seeking a rescue.

In any case, he added, eurozone bail-out money can only be given to governments, not to banks directly, even if the funding is aimed at helping states get their balance sheets back on track once they have rescued banks.

Bankia has stirred controversy after its historic €24 billion bail-out, when it emerged that one of its former executives, Aurelio Izquierdo will receive a €14 million payoff.

Leniency

The austerity-hawk commissioner, a Finnish national, said the decision is not a proof of the commission becoming more "lenient" on the eurozone's strict deficit rules, but rather of applying them based on "economic reality."

He pointed out that Spain is the only euro-country projected to stay in recession for another two years, with over a quarter of its workforce unemployed and a fragile banking sector.

Pressed whether other countries such as Greece, but also the Netherlands where the government recently fell over the strict deficit deadline, could expect similar decisions, Rehn said that the second Greek bail-out already includes a deadline extension from 2013 to 2015 for meeting the deficit target.

As for the Dutch situation, Rehn had only praise for the "high quality measures" passed by the parliament after the government fell, even if the underlying growth projections may turn out to be too optimistic later this year.

"We will have to assess them again in autumn, depending on how growth projections and revenue collection have evolved," he said.

Italy, which also came under market pressure in recent weeks due to its high debt, sluggish growth and fears related to a possible Greek exit from the eurozone, got praise for most of its actions except tax collection.

"Italy made very important reforms in the taxation area ... but there is still a high level of shadow economy and quite a high level of unpaid taxes," taxation commissioner Algirdas Semeta, also present at the press conference, said.

He added that as a matter of principle, due taxes have to be collected properly before any government proposes new taxation.

France

France, the eurozone's second-largest economy after Germany, was gently reminded that it has to stick to a deficit target of 4.4 percent this year and 3 percent next year, down from 5.2 in 2011.

"It is important that France will take effective action in order to meet its fiscal target," Olli Rehn said, expressing confidence that the new administration in Paris will soon adopt "convincing" measures so as to "respect its commitments."

In an economic forecast earlier this month, the commission warned that France risks missing its deficit target if no belt-tightening measures are taken.

France's newly elected president Francois Hollande has promised to stick to the target. But he also promised more public sector jobs - such as 60,000 more teachers - and a reduction of the retirement age to 60 for people working since they turned 18.

According to the report for France, budget cuts "remain an important policy challenge."

The 44-page long paper recommends "careful monitoring" of the long-term sustainability of the pension system, labour market reforms to promote the employment of young people and note that French businesses lack competitiveness.

Germany, on the other hand, is praised for doing more in reducing is competitive advantage - such as allowing wages to rise - and was taken off the list of 23 deficit sinners, along with Bulgaria, whose currency was once pegged to the deutsche mark.

Hungary, the first country ever to be threatened with financial sanctions under the EU's beefed up deficit rules, got its funds unfrozen after having taken "convincing" steps to reduce its deficit with more than just one-off measures.

Budapest may also be taken off the deficit sinners list later this year, once "hard data" confirm this first analysis, Rehn said.

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