Budgetary Pressure: EU Concerned as Countries Violate Deficit Rules

The European Commission on Wednesday released reports on the economic health of 17 member states. A number of them are in violation of the bloc's budget deficit rules. Brussels, though, is likely to show flexibility.

The reports issued by the European Commission on Wednesday will hardly come as a surprise. In 2008, France, Greece, Spain, Ireland, Latvia and Malta were all in violation of bloc rules calling for budget deficits to remain lower than 3 percent of gross domestic product. Now, though, Brussels has to figure out what to do about it.

European Commissioner of Economic and Monetary Affairs Joaquin Almunia addressed the press on Wednesday.
REUTERS

European Commissioner of Economic and Monetary Affairs Joaquin Almunia addressed the press on Wednesday.

The Commission will likely show a certain degree of tolerance given the expensive economic stimulus packages passed by a number of member states. "The Commission will use the full flexibility imbedded in (EU rules) when considering the next steps under the excessive deficit procedure in the weeks to come," said Economic and Monetary Affairs Commissioner Joaquín Almunia in a statement on Wednesday.

While Almunia was careful to emphasize that the stability pact was crucial for sound EU finances "once the recession is over and growth resumes," the report made it clear that, for the six countries now in violation, lower budget deficits might be a ways off. Ireland, in particular, is expected to emerge from 2009 with a bloated deficit shortfall equivalent to 9.5 percent of GDP. The report forecast a 5.8 percent deficit for Spain and 4.4 percent for France.

The report did not provide a forecast for Germany, but Berlin expects its deficit for 2009 to only slightly exceed the 3 percent cutoff, if at all.

Many had been expecting an increased number of violations of European budget deficit rules given the strength of the current economic downturn. Country's across the 27-member EU have passed hefty bank bailout bills and expensive economic stimulus plans. So far, no changes have been made to the budgetary rules, sometimes referred to as the "Maastricht Criteria," but deadlines set for countries to come back into compliance will likely be looser than they have been in the past.

European budget rules are primarily aimed at keeping the euro -- the common currency used by 16 EU member states -- stable. In recent years, the euro has done well against the dollar, soaring to almost $1.60 per euro last summer. Recently, though, it has been dragged down as a number of national economies in Europe -- along with the European economy as a whole -- have gone into recession.

More trouble may be on the horizon. A number of countries in Europe, including some euro-zone economies, are struggling to meet their debt obligations. Confidence in the region could be further eroded as countries in eastern and southeastern Europe continue to be battered by the financial crisis. Many governments across the region have taken steps this week to defend their currencies against precipitous falls.

On Wednesday, Almunia said that the Commission was watching developments across the EU. "I am concerned about the volatility of the exchange rate in EU countries with floating regimes," he said, referring to those currencies not yet pegged to the euro. "I am also concerned by the possibility that some public statements have accelerated this evolution."

In all, the European Commission issued reports on the economic health of 17 member states on Wednesday. "We are going through a very serious crisis that is taking its toll on public finances," Almunia said in a statement. He did, however, sound a positive note, saying that he still expects the European economy to show some recovery in 2010.

The report is an annual assessment. It has attracted more attention than usual given the dire state of finances in many EU member states.

cgh -- with wire reports

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