Eurogroup discusses excessive deficit roadmap (Roundup)

By Nicholas Rigillo Nov 9, 2009, 20:46 GMT

   Brussels - Eurozone finance ministers held informal talks Monday on how to return to fiscal rectitude after years of generous public spending aimed at mitigating the impact of the recession.

After their meeting, the ministers said they had been reassured about Germany's commitment to abide by the European Union's Stability and Growth Pact, despite massive tax cuts announced by the new centre-right coalition government in Berlin.

   Latest figures from the European Commission show 13 of the 16 countries which share the common European currency posting budget deficits well in excess of 3 per cent of gross domestic product (GDP) this year.

   None of the euro area countries are expected to remain within the 3 per cent limit set by Brussels in 2010, with budget deficits soaring to as much as 12.2 per cent in Greece and 14.7 per cent in Ireland.

   On Wednesday, the EU executive will assess whether France, Greece, Ireland, Spain and non-eurozone Britain have taken effective action to correct their excessive deficits.

   The commission will also propose deadlines for nine other countries where the budget deficit is expected to be above 3 per cent in 2009. These include Germany, Italy and the Netherlands.

   EU Economic and Monetary Affairs Commissioner Joaquin Almunia said such deadlines would be based on a series of factors, including a country's public debt level and its reputation, as reflected on the financial markets by bond spreads.

   For instance, Germany - traditionally virtuous in fiscal terms - was expected to be asked to bring its deficit back to within the 3 per cent limit by 2013.

Italy, by contrast, was expected to face a tighter 2012 deadline.

Almunia said he had been reassured about Germany's commitment to the EU's Stability and Growth Pact by the country's new finance minister, Wolfgang Schaeuble, who was attending his first Eurogroup meeting in Brussels.

'Minister Schaeuble is fully committed to the implementation of the pact and understands how it should be implemented during these difficult times,' Almunia said.

Officials in Brussels had quietly expressed concern that agreed tax cuts worth 24 billion euros (36 billion dollars) in 2011 could worsen Germany's already battered public finances.

The commissioner was expected to be particularly tough on Greece, in effect proposing to place the country's budget under Brussels' tight control.

EU officials have repeatedly expressed dismay at Greece's tendency to produce unreliable economic estimates, and Almunia said Monday he had volunteered his 'impressions' on Greece's forthcoming budget to Finance Minister George Papaconstantinou.

   The commissioner was also expected to impose an austerity regime on Ireland by asking it to cut its structural deficit by 2 per cent each year. The commission usually refers to annual structural cuts of about 0.5 per cent.

   Government officials are eager to reassure the financial markets that they have their public finances under control, hence the need to spell out fiscal 'exit strategies' and roadmaps on how they intend to cut their deficits.

   EU finance ministers have already agreed in principle to start withdrawing their fiscal stimuli and consolidate their public finances in 2011, but only if economic growth reaches sustainable levels by then.

   Last week, the commission published new forecasts reinforcing the view that Europe will emerge from recession in 2010 and that economic growth will be consolidated in 2011.

   However, Dutch Finance Minister Wouter Bos cautioned officials Monday against setting firm deadlines, noting that the recovery remained 'fragile' and that risks of a 'double dip' recession remained.

   'It is common wisdom that there are two big mistakes you can make: either you start stimulating too late, or stop stimulating too early,' Bos said as he arrived for evening talks in Brussels.

   Swedish Finance Minister Anders Borg, whose country holds the EU presidency but is not part of the eurozone, weighed in the discussion by saying public finances in Europe were 'on an unsustainable course.'

'It is quite clear that Europe has landed on its feet. We have avoided a depression and we haven't seen a meltdown of the financial system,' Borg said.

   However, fiscal exits should be a 'top priority', Borg said.

   Eurogroup chairman Jean-Claude Juncker of Luxembourg did not take part in Monday's talks as he was in Germany to attend celebrations marking the 20th anniversary of the fall of the Berlin Wall.