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Getting out of the red - 12/11/2009

Woman looking through binoculars with euro coins © EC

The economic crisis has left many countries with budget deficits well over the 3% limit. The commission is proposing deadlines for reducing the gaps.

A year ago, budget shortfalls of two or three times the EU limit would have been unthinkable in most countries. Now they are the norm – a legacy of the economic crisis that threatens to pull Europe back into recession.

EU countries must get their public finances back in shape - on this everyone agrees. The question is how quickly? Many are reluctant to cut spending anytime soon for fear of stalling the incipient recovery. The commission timetable gives 13 countries between two and five years to reinstate fiscal discipline.

Under EU rules, current and potential eurozone members must keep their budget deficits below 3% of gross domestic product, although they are allowed some flexibility when the economy sours. The rules - part of the EU’s stability and growth pact – are aimed at preventing imbalances that could undermine the eurozone.

On average, EU countries posted deficits of 0.8% of GDP in 2007 and 2.3% in 2008. That is expected to triple to 6.9% this year and climb to 7.5% in 2010.

The gaps between government spending and revenue ballooned during the crisis as governments boosted spending to shore up their banking systems and revive their economies. With tax revenues falling sharply, many had to borrow the money.

Paying off this debt is already expensive, even though interest rates are low. Any rise in rates could put a brake on the recovery, economic affairs commissioner Joaquin Almunia warns.

The commission proposes a deadline of 2013 for nine countries: Germany, France, Spain, Austria, the Netherlands, the Czech Republic, Slovakia, Slovenia and Portugal.

Italy and Belgium would have until 2012, Ireland until 2014 and Britain until fiscal year 2014-15. The recommendations are subject to council approval.

For France, Spain, Ireland and the UK, the proposals represent a reprieve as those countries had faced earlier deadlines because they already posted deficits above the 3% limit last year.

The commission urged Greece to take immediate action, saying the country has not done enough to close its gap. Greece expects to post a deficit of nearly 13% this year, far more than previously estimated.

More on excessive deficit procedure

 

Finacial and economic crisis – EU's response

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