Tuesday

23rd Jan 2018

France and Italy warned again on economic weakness

  • "The recovery in the EU remains slow and fragile," the commission said (Photo: Images_of_Money)

The European Commission warned France and Italy again on Tuesday (8 March) that their economic weaknesses risked destabilising the other EU economies.



Spain, for its public and private debt, and Germany for its large current-account surplus, were also singled out.

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The commission published its findings on structural reforms and macroeconomic imbalances in member states as part of the European Semester mechanism to monitor EU countries economies and budgetary policies.

The commission said five countries were experiencing excessive imbalances: Bulgaria, Croatia, France, Italy and Portugal. Seven other countries were experiencing imbalances: Finland, Germany, Ireland, the Netherlands, Spain, Sweden and Slovenia.

Overall, the EU executive said “the European economy is pursuing its moderate recovery while external risks have increased”, and warned of difficulties ahead.

"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," it said in the report.

"The recovery is weak both in historical perspective and compared to other advanced economies."

The assessment follows the country reports published last month in which the commission already highlighted the weaknesses of the EU economy.

"The situation differs across countries but in general the main reasons for concern are the persistence of very high levels of indebtedness, be it public, private or external," the commission's vice-president for the euro, Valdis Dombrovskis, said at a press conference in Strasbourg.

The two main worries are France and Italy, where perspectives are still bleak despite efforts to reform.

In France, "large public debt coupled with deteriorated productivity growth and competitiveness may imply risks looking forward, with cross-border relevance", the commission said, signalling in its language the risk of contagion to other countries.

It noted that "public debt keeps increasing and recent developments do not point to a clear upswing in competitiveness and productivity" and that "no recovery in investment is projected before 2017".

"Effective structural reform implementation remains essential," it said, as the French government is faced with strong opposition to a labour market reform it has not yet presented.

In Italy, the commission said that "high government debt and protracted weak productivity dynamics imply risks looking forward", and also warned of "cross-border" impact.

The situation in the banking system remains worrying, with non-performing loans being the main risk.

"High long-term unemployment weighs on growth prospects," the commission also noted. It added that "public debt reduction would require higher primary surpluses and sustained nominal growth looking forward".

Spain, which is still waiting for a government and a revised budget two and a half months after an inconclusive election result, continues to be weakened by "large stock imbalances in the form of external and internal debt, both public and private".

While noting "a context of high unemployment", the commission said that "further action is needed, in particular regarding the wage-setting process, innovation and skills and compliance with the stability and growth pact".

German surplus

A particular case is Germany, the EU's main and most robust economy, where imbalances result from an excess of money.

"The large and persistent current account surplus has cross-border relevance and reflects excess savings and subdued investment in both the private and public sectors," the commission said.

It noted that "weak domestic investment hampers potential growth and strong reliance on external demand entails macroeconomic risks in a context of subdued foreign demand".

Reflecting a long-term concern it has previously expressed, the commission pointed out that "public investment has fallen, despite the available fiscal space and favourable financing conditions, and steps taken to increase public investment are insufficient to meet the infrastructure investment gap".

As the €315 billion commission investment plan has still to bear fruit, the commission stressed that there is a need to attract more private financing for investments in the real economy and to ensure good quality public investment.

"Investment has so far failed to emerge as a strong driver of the recovery," it noted, asking member states to ensure a "conducive" environment to business.

EU sneaks in bleak economic report

Annual country reports published Friday afternoon by the European Commission highlight challenges ahead for the EU economy.

Europe’s battered economy in moderate recovery

Most EU states will post modest growth in coming years, the Commission predicts. But Greece will continue to struggle, while France, Portugal, and Spain could fall foul of EU rules.

Deflation fears trigger ECB's 'bazooka'

In a new attempt to revive the economy, the European Central Bank has decided to cut rates further in the negative and to step up its bond buying programme.

The French protest that wants to redefine politics

The Nuit Debout movement is a protest against a labour market reform. But its participants are rejecting the political system and especially the policies followed by the centre-left government.

EU recovery to slow this year

On just 1.8 percent growth, the commission's forecast is less optimistic than before because of an instable global economy and lack of results of EU reforms.

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