Global Economics

Finance Ministers Fret over European Budgets


Public debt among euro member countries could hit nearly 7% of GDP next year, and finance ministers are gearing up for painful budget cuts to close the gap

Discussion at a meeting of euro area finance ministers on Monday (9 November) was dominated by the group's growing need to tackle its poor public finances, but the exact timeframe still remains controversial.

"Restoring the public finances and tackling unemployment will be the priorities for the time to come," Spanish economy minister Elena Salgado told journalists after the meeting in Brussels.

Ms Salgado was standing in for the group's chairman, Jean-Claude Juncker, who was in Berlin for the 20th anniversary celebrations of the fall of the Berlin Wall.

Recent European Commission forecasts suggest the average deficit for the 16-member area will triple this year to reach 6.4 percent of GDP, rising further to 6.9 percent in 2010. The large hole in public coffers has resulted from the billions poured into failing banks, stimulus measures and support for the unemployed.

The finance ministers agreed that painful budget cuts should start in 2011 at the latest, provided economic growth rates are in line with Commission predictions.

"If things go the way most central projections suggest, then 2011 would be the year to start consolidation and fiscal exit," said Dutch finance minister Wouter Bos. "We shouldn't stop stimulating too early."

Excessive deficit dates

However a number of member states are thought to be unhappy with the timeframe to restore public finances to health that will be handed down by the EU commission this Wednesday.

Under the EU's Stability and Growth Pact, member states are required to maintain their budget deficits within 3 percent of GDP, although only those in the euro area could, in theory, be fined for not doing so.

The commission anticipates that 13 of the group's 16 members will exceed the threshold this year, with the rest to follow in 2010. At the extreme end, Ireland and Greece are expected to run deficits of 12.2 and 14.7 percent of GDP, respectively, next year.

On Wednesday the EU executive will issue reports assessing efforts by France, Spain, Ireland, Greece and non-euro area UK to start to bring their deficits back into line.

At the same time Germany, Europe's largest economy, and eight other EU countries are set to receive deadlines to correct their deficit overruns.

EU economy commissioner Joaquin Almunia said he will "finalise" his demands based on "fair" treatment for all EU members, using a country's level of debt but also its reputation for fiscal rectitude as criteria.

France is reported to be unhappy with its expected deadline of 2013 to bring deficits below three percent, with the country's prime minister, Francois Fillon, saying as recently as last week that he needs until 2014.

Italy is expected to be given until 2012 to comply, Spain and Germany until 2013, Ireland until 2014 and the UK until 2015.

Mr Almunia said he had been reassured by Germany's new finance minister that the country was committed to the Stability and Growth Pact, despite the recent announcement of large tax cuts by the new centre-right government.

Greece is expected to receive a particularly tough time from the EU executive, with dismay in European quarters last month over a large upward deficit revision following the election of a new government in the southeastern member state.

Mr Almunia gave no indication regarding the level of painful cuts he will seek in the coming years, but a document seen by Reuters suggests Germany, France and Spain will be asked to cut public deficits by 0.5, 1.25 and 1.75 percent of GDP each year, respectively, up to 2013.

The process is likely to start in 2011 for Germany and France, and a year earlier for Spain, according to the document.

On Tuesday EU finance ministers will discuss the need for a co-ordinated strategy to end state guarantees for banks.

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