27 July 2024

POLITICAL DYNAMITE: European Commission Warns 8 Nations of 'Excessive' Debt + Ballooning Budget Shortfalls.

The EU’s Council opened formal proceedings on Friday against multiple member states deemed to have shortfalls in domestic budgets.
Those in the breach include Poland, Belgium, France, Italy, Hungary, Malta, and Slovakia 

EU formally opens deficit proceedings against eight member states

By Jack Schickler

Published on Updated 
The Council, which groups the EU's 27 member states, sent the legal warning to Belgium, France, Italy, Hungary, Malta, Poland, and Slovakia and agreed to continue a legal procedure that has applied to Romania since 2020. 
The EU’s fiscal rules, introduced alongside the common euro currency in the 1990s, say the imbalance in national fiscal positions shouldn’t be over 3% of GDP, with overall debt kept under 60%.  . .

Political dynamite

Those rules have long proved political dynamite, as northern member states such as Germany and the Netherlands are reluctant to pay for what they see as reckless spending in Greece or Italy. 
The move occurs as both France and Belgium, in both of which public debt exceeds 100% of GDP, attempt to form governments from splintered coalitions.  

  • Two weeks ago, France’s Court of Auditors said the state of public finances was “alarming”, and finance minister Bruno Le Maire, part of Gabriel Attal’s caretaker government, may step down imminently given the drubbing taken in a June legislative election.
  • It also represents a new front in the war between Brussels and Giorgia Meloni’s right-wing government.

On Wednesday, the Commission berated press freedom in Italy after Meloni filed legal cases against individual reporters who criticised or mocked her.

Post-pandemic rules

The EU’s deficit framework, known as the Stability and Growth Pact, was abandoned in 2020 when the COVID-19 crisis, and subsequent energy price explosion, led governments to make unprecedented and expensive economic interventions.
After much haggling, member states earlier this year agreed on a more flexible set of budget constraints to apply as of this year, allowing more wiggle room for spending on climate change or defence.
That late agreement means timelines for settling budget policy have been truncated this year, perhaps explaining why the EU adopted its warning on the afternoon of the day when many officials depart for summer holidays.
Ministers are expected to endorse formal recommendations for profligate countries to bring deficits back down in December.
Brussels officials have already been in touch with finance ministries in affected countries to recommend trajectories for correcting the imbalance, implying politically painful tax rises or spending cuts.

EU's wobbly budget rules can bolster shaky economy | Reuters
BRUSSELS, June 3 (Reuters Breakingviews) - Europe’s new budget rules can work only if Brussels can stretch them. 
Eleven countries including France, Italy and Belgium, posted, opens new tab, opens new tab 2023 deficits above 3% of GDP, the official high water mark for debt. But not all of them may end up being sanctioned. The regime includes ample wiggle room, allowing countries plenty of time to adjust. 
That’s good news for a bloc that needs growth more than guardrails.
To keep up with the United States and other global competitors, the 27-country European Union needs to square a circle. It has to grow faster than the anemic 1.4% annual expansion the bloc has averaged since 2006.
But it also needs to fund the green transition and increase defense spending. And it can’t abandon the fiscal safeguards built into the bloc’s founding treaties that limit government borrowing and aim to cap member states’ total debt at 60% of GDP.. And it can’t abandon the fiscal safeguards built into the bloc’s founding treaties that limit government borrowing and aim to cap member states’ total debt at 60% of GDP

WILDCARD

EU funds €1.5bn of Ukraine aid from proceeds of frozen Russian assets
 

The EU could have a momentous year in store
 


REFERENCES 

Regional Reports and Blogs

REOREGIONAL ECONOMIC OUTLOOK

April 2024

A soft landing for Europe’s economies is within reach. Securing the baseline of growth with price stability will require careful monetary policy calibration. Faster fiscal consolidation would ensure buffers are adequate to tackle future shocks, while structural fiscal reforms would help address mounting long-term expenditure pressures. Beyond the near-term recovery, raising potential growth prospects calls for efforts at both the domestic and European levels. Measures should aim to raise labor force participation, prepare the workforce for looming structural shifts, set an enabling environment for private investment, and promote innovation on a level European playing field—especially when it comes to the green transition, including through a strong commitment to carbon pricing. Greater European integration would amplify the effect of these reforms. Formulating an ambitious set of growth-enhancing reforms should be a key priority of a new EU commission.

IMF Blogs - Europe

Country Reports

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