EU economies to breach deficit limits

By Patrick Corby

Austerity measures throughout the European economy are to be loosened as France, Spain and the Netherlands, three of the five largest European economies, will fail to meet deficit limits mandated to curb wild government spending.

European contraction increases as debt limits are not adhered to, Alamy

European contraction increases as debt limits are not adhered to, Alamy

The mandate since the sovereign crisis emerged from the 2007 financial crisis has seen annual deficit limits of 3%. New data released by the European Central Bank (ECB) shows all three will grossly miss this target with Italy, Europe’s third largest economy, increasing its deficit by 2.9%

The currency bloc taking into consideration these new factors will contract 0.4% this year instead of the projected 0.3%.

Despite three years of austerity mandates in the currency bloc, the new data shows a continuing runaway increase in debt levels in Europe. Next year the total debt-to-GDP for the whole market area of Europe will verge stand at 96% of GDP meaning the whole bloc is now running itself by borrowing almost 100% of its output.

With 120% of GDP standing as the level where confidence is lost on the repayment of loans, the countries that are set to run through that limit stand as: Italy (132%), Portugal (124%), Cyprus (124%), Ireland (120%) and Greece (175%).

Unemployment in Europe stands at a total of 11% of the 739m-strong, population or 81.29m individuals, and is projected to keep falling. Spain tops the group with an unemployment rate of 26.5%, Cyprus stands at 15% and is set to now rise as the economy contracts 8.7% this year after the nationalisation of banks in early March.

Olli Rehn, European vice-president for economic and monetary affairs, stated:  “In view of the protracted recession, we must do whatever it takes to overcome the unemployment crisis in Europe. The EU’s policy mix is focused on sustainable growth and job creation. Fiscal consolidation is continuing, but its pace is slowing down. In parallel, structural reforms must be intensified to unlock growth in Europe.”

France and Spain have been given an extra two years grace period in order to adjust their deficit limits, whilst the Netherlands have been given an extra year.

The French stated it needed an extension of one year in order to cut its deficit, which will increase its debt by 4.2% this year. EU officials, upon an analysis of the matter, extended the limit to two years, allowing France extra time instead of forcing massive cuts into the country.

“In order to bring the deficit below 3 per cent next year, as envisaged by the French authorities, a significantly larger and front-loaded effort of fiscal consolidation would be required compared to what is currently planned,” Rehn said.

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