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19th Jan 2020

EU warns Portugal, says bloc needs permanent crisis fund

  • European economy commissioner Olli Rehn (Photo: European Commission)

The European Commission has warned Portugal it may need to take extra steps to cut its budget deficit this year, adding that the economic crisis has highlighted the need for a permanent fund inside the eurozone to help struggling states.

Speaking to journalists in Brussels on Wednesday (14 April), economy commissioner Olli Rehn said Portuguese government plans to reign in excessive spending and increase tax revenues were generally solid, but not without risk.

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"If risks to the macro and fiscal developments materialise in the short term, additional measures might be needed especially for this year," said the Finnish politician who took over the EU's economy reins in February, in the middle of an economic storm.

In a bid to avoid similar difficulties to those seen in Greece, Lisbon unveiled a draconian package of austerity measures early last month, but investors have expressed doubts at the centre-left minority government's ability to push them through.

As a result, markets have continued to identify the southern European economy as one of the euro area's most vulnerable, leading the Fitch credit rating agency to downgrade Portugal's rating late March.

The same agency on Wednesday said Greece may be forced to call on a recently brokered EU/IMF rescue plan before the end of April. "It could well be a week or two. I don't think they could leave it much longer than that," Fitch rating's director Christopher Pryce told Bloomberg news.

During a teleconference last Sunday, eurozone finance ministers agreed to provide up to €30 billion in bilateral loans to Athens this year, should it be requested, with an estimated €15 billion potentially coming from the IMF. The commission has denied reports that the overall three-year (2010-2012) package for Greece from euro area members might amount to as much as €90 billion.

Permanent EU crisis fund

Mr Rehn's comments on Portugal came shortly after the college of 27 commissioners held its first "exchange of views" on plans to increase economic co-ordination and surveillance within the EU, in order to prevent future fiscal crises.

EU budgetary restrictions are laid down in the bloc's Stability and Growth Pact, but rules limiting annual deficits to three percent of GDP, and total debt to 60 percent of GDP, have repeatedly been broken by national governments. "Peer pressure lacked teeth, good times were not used to reduce public debt, macroeconomic imbalances were neglected," said Mr Rehn.

As a result, the EU executive body says it will come forward with concrete plans on 12 May to toughen up the bloc's fiscal rules, measures that it argues can be carried out under the current Lisbon Treaty.

The communication, draft details of which will be discussed by EU finance ministers meeting for an informal meeting in Madrid this Friday, will seek to sharpen the teeth of the Stability and Growth Pact, potentially calling for a suspension of EU cohesion funds for repeat offenders.

The document will also explore mechanisms to limit the build up of macro-economic imbalances between member states, and outline proposals to set up a permanent crisis fund to help struggling states.

"The ad-hoc mechanism for possible financial assistance for Greece serves the immediate need," said Mr Rehn. "However the college is of the view that it is necessary to set up a permanent crisis resolution mechanism with strong built-in disincentives for activation, including of course vigorous conditionality."

"We see this of a last possible resort ...but still, as we have seen, better safe than sorry," he added.

Commission defends it right of initiative

At a European Summit in Brussels last month, EU leaders asked the council's new permanent president, Herman Van Rompuy, to establish a task force on greater EU economic co-ordination, charged with drawing up measures by the end of the year on how to achieve this aim.

Some seasoned EU observers subsequently said the move amounted to an erosion of the commission's sole right to initiate EU legislation.

On Wednesday, centre-right MEP Corien Wortmann-Kool said she supported the commission's move to come forward with its own proposals anyway. "For us, it is very important that the commission uses its right of initiative and does not wait for the task force to come up with its own proposals," she said.

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The budgets of eurozone members could first need EU approval before being then being passed on to national parliaments, under radical new plans to be presented by the European Commission this May.

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