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EU forecasts France, Italy, Spain, to miss budget targets

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05/03/2016 | 12:34pm CEST
European Union flags are reflected in a window at the headquarters of ECB in Frankfurt

France, Italy and Spain are set to miss European Union budget targets this year and next without urgent government action, European Commission forecasts showed on Tuesday.

Excessive debts and deficits in the three biggest economies of the euro zone's Mediterranean south, at a time when bloc leader Germany's forecasts show rude fiscal health, may fuel further debate on whether the EU executive should impose fines.

Portugal will also likely be in breach of EU budget rules.

Euro zone growth will be slower than expected, with gross domestic product expanding 1.6 percent this year and 1.8 percent next compared to 1.7 percent in 2015, the Commission said -- a limping performance at a time when the European Central Bank's money printing policies are under fire from Berlin.

The 2016-2017 GDP forecasts were down 0.1 point from those in February. The Commission saw slower growth in China and other trade partners, increased global tension and volatile oil prices as well as the uncertainty over whether Britain, the EU's second economy, will vote to quit the bloc in a referendum next month.

The Commission's forecasts, together with medium-term fiscal consolidation plans submitted by governments last month will be the basis for a Commission decision, in the second half of May, on whether to step up the disciplinary procedure against those states which are in breach of the rules.

Under the rules, sharpened at the height of the euro zone sovereign debt crisis, governments that repeatedly fail to meet their deficit or debt reduction obligations can face fines.

FRANCE

The Commission said that even though France had a smaller than required nominal deficit in 2015 and was on track to meet the goal set for it for 2016, it would fail to bring the gap below 3 percent in 2017 as required unless it made new savings.

"The target for 2017 is perfectly feasible, I am not worried by it, but provided that France maintains its limit on public financing and in a serious fashion," European Commissioner for Economic and Financial Affairs Pierre Moscovici said.

But France, which will hold presidential and parliamentary elections next year, would also completely miss the targets set for cutting its structural deficit -- a measure that strips out business cycle effects and one-off revenue and spending.

The structural balance, seen by the EU as the best measure of reforms a government undertakes to improve the economy, is to remain at an unchanged 2.4 percent of GDP in 2016 against last year and rise to 2.7 percent in 2017.

Yet under EU rules, countries must cut the structural gap by 0.5 percent of GDP a year until they reach balance or surplus.

Last year EU ministers set an even more ambitious path for France because the country was given an extra two years, for the third time in a row, to cut its deficit below 3 percent.

EU ministers asked France to cut the structural gap by 0.5 percent of GDP in 2015, 0.8 percent in 2016 and 0.9 percent in 2017. Yet Paris made a cut of only 0.3 percent last year, will not cut it at all this year and the deficit will actually rise by 0.3 percent in 2017, the Commission forecast.

SPAIN

The forecasts showed Spain, which in June will hold a second parliamentary election after six months of party deadlock, was falling short on all measures of public finances improvement.

Madrid was to bring its nominal deficit below 3 percent this year, but instead would have a shortfall of 3.9 percent after badly missing reduction targets last year. The country will not even go below 3 percent next year, unless it takes action, the Commission said.

Spain's structural deficit, rather than fall sharply as demanded by EU finance ministers, would rise to 3.1 percent this year from 2.9 percent in 2015 and then to 3.2 percent in 2017.

Spain's debt, which under EU rules should fall by a twentieth of the difference between its actual level and the EU limit of 60 percent of GDP a year on average over 3 years, is to rise in 2016 to 100.3 percent of GDP from 99.2 percent in 2015.

ITALY

Rome is comfortably below the 3 percent EU ceiling with its nominal deficit, but it is obliged to cut the structural deficit by 0.5 percent of GDP a year. But the Commission forecast that the structural gap will rise from 1.0 percent in 2015 to 1.7 this year and stay at 1.7 percent in 2017.

Italy's debt, the second highest in the EU after Greece's, should be falling, but instead the debt is to stay flat at 132.7 percent of GDP this year, after rising steadily in recent years.

PORTUGAL

Lisbon was supposed to cut its budget deficit to 2.5 percent of GDP already last year, but missed that goal mainly because it had to rescue its Banif bank, which boosted the gap to 4.4 percent. Without that one-off, Portugal's deficit in 2015 would have been 2.8 percent of GDP, the EU statistics office said.

But like France, Portugal was badly missing its structural deficit reduction targets, the Commission forecasts showed.

EU finance ministers had asked Portugal in 2013 to cut the structural shortfall by 0.6 percent of GDP in 2013, 1.4 percent in 2014 and 0.5 percent in 2015.

Portugal cut the gap as required in 2013, fell short by 0.5 percent of the target in 2014 and the deficit actually rose by 0.6 percent of GDP last year, rather than fall by 0.5. The Commision expects it will increase more this year and next.

(Editing by Alastair Macdonald)

By Jan Strupczewski

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