Brussels faces tough balancing act on budget cuts

Nov 10, 2009, 9:20 GMT

   Brussels - The European Commission faced accusations of favouritism Tuesday as it prepared to issue different deadlines for European Union governments to restore their public finances.

   Latest figures from the European Commission show a majority of European Union member states posting 2009 budget deficits well in excess of the 3 per cent of gross domestic product (GDP) limit set by the bloc's Stability and Growth Pact.

Deficits have soared as a result of governments spending aimed at mitigating the impact of the recession.

But the commission's guidelines, to be unveiled on Wednesday, were expected to set different deadlines for governments to return to fiscal rectitude, sparking unease in several member states.

France, for instance, was expecting to be told to cut its deficit to within 3 per cent of GDP by 2013. A similar deadline is likely to be imposed on Germany.

But while German Finance Minister Wolfgang Schaeuble, speaking at the start of a meeting of EU finance ministers in Brussels, said that 2013 was 'exactly what we want', France has expressed irritation at the deadline.

Ahead of the meeting in Brussels, French Budget Minister Eric Woerth was quoted in the French media as saying that 2013 would be a 'very difficult' deadline to meet.

The French government, which estimates a deficit of around 8.5 per cent in 2010, is aiming for a 5 per cent deficit by 2013, with Woerth saying this reflects 'considerable' effort on France's part.

The EU's economic and monetary affairs commissioner, Joaquin Almunia, explained Monday that the different deadlines would take into account 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, the commissioner was expected to be particularly tough on Greece, in effect proposing to place the country's budget under Brussels' tight control. Greece's budget deficit is expected to exceed 12 per cent this year.

   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. Ireland, which is bracing itself for a 2014 deadline, is eyeing a jaw-dropping deficit of around 15 per cent of GDP.

Italy, meanwhile, says its 2012 deadline is in line with its own plans, but has quietly voiced unease at the fact that it should start cutting spending as soon as 2010.

'A majority of countries are above 3 per cent because of the recession of the past two years. Now we need to establish the adequate deadlines and paths for the corrections of these excessive deficits,' Almunia said Tuesday.

   The European Commission is eager to reassure financial markets that it has the bloc's public finances under control, hence the need to spell out fiscal 'exit strategies' and deficit 'roadmaps'.

   EU finance ministers have already agreed in principle to start withdrawing their fiscal stimuli 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.