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4th Feb 2023

Barroso urges reform as shine fades on bail-out

European Commission President Jose Manuel Barroso has called on member states to tackle the imbalances behind the eurozone's recent crisis, as the sheen on Europe's day-old financial support mechanism already shows signs of fading.

"It's not just about giving money, its about asking member states of the eurozone to make additional efforts for the correction of some unbalances that still exist," Mr Barroso said on Tuesday (11 May) after meeting with OECD secretary general Angel Gurria in Brussels.

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EU finance ministers yesterday agreed a massive €750 billion relief package, together with the IMF, to prop up struggling eurozone governments that may need to request external help. Just days before, euro area leaders signed off a €110 billion bail-out for Greece.

Rising government debt and deficit levels have catapulted the region into a maelstrom of financial turmoil in recent months, as investors increasingly questioned the credit-worthiness of member states.

Mr Gurria said Monday's rescue package "has credibility" and was "the right size". "I think it is going to generate the time to look objectively" at the fiscal problems that made it necessary in the first place, he added.

"We will see in the next few days Portugal announce special additional efforts and I'm sure that tomorrow Spain will come out with a very strong package," the OECD chief said in reference to the two southern economies that have come under the glare of markets.

Others agree that the massive eurozone support package - made up of €60 billion in immediately accessible funds, €250 in IMF money and €440 in bilateral loan guarantees - will do little more than buy the beleaguered currency bloc limited breathing space.

On Monday, Finnish Prime Minister Matti Vanhanen said: "The most important thing after this decision ... is to avoid feeling good about everything being well permanently, because in the background there are the bloated deficits."

As well as agreeing stronger budgetary rules to stamp out excessive deficits, Mr Vanhanen said the EU must implement structural reforms to increase its competitiveness relative to the rest of the world.

The economy of the eurozone contracted 4.1 percent in 2009, and is expected to grow by a meagre one percent this year. In comparison, the United States, where the crisis originated, saw its economy dip just 2.4 percent last year, with growth of 3.1 percent forecast for 2010.

Already on Tuesday, market euphoria related to the European financial stabilisation mechanism showed signs of waning, with European stocks and the euro currency closing lower than the previous day.

Commission proposals

Mr Barroso's comments come less than 24 hours before the EU executive is due to publish an ideas paper on greater economic co-ordination and tighter budgetary rules for the European Union.

Speaking from New York on Monday, the EU's internal market commissioner Michel Barnier said greater harmony in budget policies would be needed to prevent a repeat of the recent crisis that plunged the euro currency.

"More economic governance is needed in the eurozone, more co-ordination and supervision of budgetary and economic policies," he said.

However, colleague Olli Rehn, the EU's economy commissioner, received a frosty reception from EU finance ministers meeting in Madrid last month when he suggested euro area members and the commission should examine national budgets before they were passed to national parliaments.

Amongst other ideas expected to feature in Wednesday's commission communication are plans to reduce EU funding for national governments that repeatedly break the bloc's budgetary rules.

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