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Christina Vasilaki: European Commission Ultimatum to France, Italy and Belgium for the Reduction of their Budget Deficits and Implementation of Reforms

European Commission Ultimatum to France, Italy and Belgium for the Reduction of their Budget Deficits and Implementation of Reforms

France, Italy and Belgium have been provided with a three-month prolongation period by the Commission, so as to put their public finances in order. After the process of evaluating the draft budgets of the 16 member-states of the Eurozone, the European Commission ruled on Friday, 28 November, that the three counties must make further efforts to reduce their deficits and make their economies more competitive.

Overall, seven European countries are “faced with the risk of non-compliance with the Stability and Growth Pact in 2015,” said Pierre Moscovici, Commissioner for Economic and Financial Affairs. The other four countries, Austria, Spain, Portugal and Malta, were called upon by the Commission to take corrective measures, although they were not given the ultimatum of March.

The draft budgets of five countries (Germany, Ireland, Luxemburg, the Netherlands and Slovakia) were deemed “compatible” with the Pact, whereas with regard to Estonia, Latvia, Slovenia and Finland, the Commission held that their budgets will be “compatible in general terms”.

Concerning Germany in particular, the Commission concluded that, despite the fact that its draft budget was given the “green light”, there is still “scope for the country to increase its public investment” with regard to its current account surplus. These interventions, however, proposed to Germany by the Commission, belong to the sphere of non-binding measures as opposed to coercive deficit reduction measures.

Both Greece and Cyprus are excluded from this process, due to their fiscal adjustment programmes.

Nevertheless, this procedure, which has been in force for a mere two years, also provides for recommendations, monitoring procedure, as well as sanctions for those Eurozone countries that do not comply with the rules of the Pact regarding deficit and debt (3% threshold on deficit and 60% on debt, or otherwise coordinated effort and implementation of agreed structural reforms in order to timely correct them). These rules are included in the so called “Two-Pack,” which came into force in May 2013 and aims to coordinate the economic and fiscal policies of the Eurozone countries, so as to prevent future financial crises.

Evaluation is carried out along two axes: on the one hand, in relation to the “quality of the budget execution for 2014” and, on the other, with regard to the financial and reform effort that is reflected in the budget for 2015.

Threat of Sanctions

France, which is currently under the EU’s excessive deficit procedure (EDP), had made a commitment last year to achieve the target of 3% deficit by 2015. However, according to the Commission forecasts, in 2016 France will have the largest deficit among all member-states of the Eurozone, which shall even reach 4,7%. In this context, the country faces the risk of sanctions of up to €4,2 bn., provided that the Commission concludes that it has not taken all agreed measures to consolidate its finances.

Italy and Belgium do not face the threat of sanctions so far, although they could also be included in the EDP for not addressing their mounting public debt.

“All political options and political decisions are open, according to the Stability and Growth Pact,” said Valdis Dombrovskis from Brussels, Vice President of the European Commission and responsible for the Euro currency policies. “Whether they will be used or not depends primarily on the member-states,” he emphasised.

For his part, the President of the Commission, Jean-Claude Juncker, said in an interview in three European newspapers: “I chose not to impose any sanctions. It would indeed be easy to penalise the countries that do not respect the rules of the Pact, but instead I decided to allow them to express their views and to listen to them”.

Political Solution

In light of the first signs of “non-compliance” of France and Italy immediately after 15 October, when all draft budgets were submitted for examination, the Commission had responded in a strict manner, asking -through letters- for measures to align with the fiscal rules of the Eurozone. The two countries had openly reacted but took certain interventions into account, whereas they emphasised that there is no more room for additional measures. It had become obvious since long that Brussels was looking for a way to handle the situation so as not to directly affect the second and third economies of the Eurozone, but at the same time to avoid providing an excuse for countries undergoing tough fiscal adjustment programmes to speak of a “two-speed” Eurozone.

The solution came through the delay and postponement of decisions regarding whether and what sanctions to impose, until early March.

“We decided not to take any hasty decisions that could not be applicable after the publication of the final figures for 2014. These three countries have committed themselves at the highest level -i.e. through their prime ministers- to adopting structural reforms that favour growth in early 2015,” said Pierre Moscovici, stressing that this arrangement of shifting the timeframe for decision-making, is
“both politically and economically justified”.

Moreover, he implied that this is the “last chance” offered to these countries, underlining that “we cannot afford to waste any time now” and that the Commission “is ready to assume its responsibilities” in case that the additional reforms and necessary cutbacks do not materialise. Finally, he pointed out that “this period has to be used to make specific efforts in order for progress to be made by March”.

To conclude with, the overall deficit of the Eurozone -according to the budgets of the “16”- is estimated at 2,2% of GDP in 2015 (from this year’s 2,6%), based on the European Commission, whereas the overall debt ratio shall remain unchanged in the next year, at 93% of GDP.