European Commission President Jose Manuel Barroso gives a thumbs-up as he makes a speech during The State of the Union conference in Florence May 9, 2012.
Credit: Reuters/Giampiero Sposito
BRUSSELS |
(Reuters) - The European Commission will set out its economic strategy for the euro zone on Wednesday, spelling out measures to balance growth with unpopular fiscal consolidation that will be particularly pointed for Spain and Italy.
The Commission will issue specific recommendations for each of the 27 European Union members, as well as for the 17 sharing the euro. Once endorsed by EU leaders in June, the executive's plans will become binding for the 27-nation bloc.
Italy, the euro zone's third biggest economy and a country under close market scrutiny because of its large debt and slow growth, is likely to get praise for its fiscal consolidation efforts under technocrat premier Mario Monti, a draft document obtained by Reuters shows.
"The policy response to ensure sound public finances and tackle Italy's long-standing structural weakness has been determined and wide-ranging," reads the draft, which may be yet changed before adoption.
"Italy has been implementing a bold fiscal consolidation strategy which should allow correcting the excessive deficit by 2012 and achieving ... a broadly balanced budgetary position in structural terms by 2013, one year earlier than recommended."
Spain, struggling to wrestle down its deficit and recapitalize its debt-laden banking system, is unlikely to get such a positive write-up.
There has been speculation that the Commission, the guardian of EU rules, will shift its emphasis from austerity to growth, without which euro zone debts cannot be reduced.
New French President Francois Hollande has championed a greater focus on growth over budget cuts and Commission President Jose Manuel Barroso reiterated on Tuesday that the euro zone needed both to regain investor confidence.
He also said the EU's budget rules, the Stability and Growth Pact, should take into account differences between states - a possible shift in emphasis towards growth, one that could benefit countries such as Spain and Italy, whose excessive debts could yet pose a threat to the future of the currency bloc.
"We will ... set out our line on implementing the Stability and Growth Pact in a growth-friendly and differentiated way applying its in-built scope of judgment," Barroso said in a speech, comments that imply a degree of flexibility.
While Spain has repeatedly said it does not want to be cut any slack, it would make its budget consolidation efforts more manageable if it had longer to meet the target. Similar flexibility would help several other strapped euro zone states.
Spanish 10-year borrowing costs have surged to 6.5 percent on investor concerns about the cost of rescuing the country's banking sector and supporting its indebted regions. A seven percent yield was the tipping point that pushed Ireland and Portugal into taking EU/IMF bailouts.
SHIFT OF EMPHASIS?
Some economists expect a switch in the Commission's focus to structural budget deficits, which exclude one-off items and the effects of the economic cycle, from headline deficits, which at a time of recession are larger.
"The Commission will monitor the impact of tight budget constraints on growth, enhancing public expenditure, and on public investment," Barroso said.
"If necessary, the Commission will give guidance on the scope for possible action within the boundaries of the European Union and national fiscal frameworks."
The draft report on Italy says the priority areas for Rome are its public finances, reforming labor markets, education and market regulation, as well as making taxation more growth friendly and a more efficient organization of the judiciary.
It calls on Italy to adopt laws that would implement an agreed balanced budget rule and urges the government to tackle Italy's grey economy - such as undeclared work. But it says Rome's reform plans are ambitious and relevant.
Spain has vowed to reduce its budget deficit, which stood at 8.9 percent of GDP last year, to 5.3 percent in 2012 and 3 percent in 2013. With its economy in recession, many officials believe the targets are overly ambitious.
Some policymakers have said Madrid could get more time to reduce its deficit if it presented a credible 3-4 year plan of fiscal adjustment.
The need for more time was underlined last week, when previously undisclosed data showed Spain's 17 autonomous regions will need to refinance 36 billion euros of debt this year, rather than the 8 billion euros initially expected. It also faces a 19 billion euros bill to rescue troubled lender Bankia.
(Reporting By Jan Strupczewski, editing by Mike Peacock)
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