Europe cracks whip on bloated deficits

(BRUSSELS) - Europe cracked the whip on bloated national deficits on Wednesday, but flagging hopes of economic recovery sharpened divisions on ending governments' economic life support measures.

Nine more European Union countries -- taking the total to 20 out of 27 -- were named and shamed for breaching fixed deficit limits.

But worse-than-expected data on putative growth simultaneously lent support to those, led by Britain, who oppose pulling the plug on trillions of euros of pump-priming by a 2011 target date.

Austria, Belgium, the Czech Republic, Germany, Italy, Slovakia, Slovenia, the Netherlands and Portugal became the latest to break commitments to hold deficits to within three percent of gross domestic product.

Just in Germany, Europe's biggest economy, leaked government documents show that the public deficit needs to be cut by 40 billion euros (56 billion dollars) between 2011 and 2013.

"Although the deficit levels are exceptional in nature... they are neither close to the reference value nor temporary," said a damning statement by the European Commission.

Thirteen of the 27 are also budgeted to cross the 60 percent of GDP threshold for national debt -- the historic accumulation of annual deficits plus compound interest -- by 2010.

Economic and Monetary Affairs Commissioner Joaquin Almunia said the bloc's stability and growth pact, the cornerstone of its economic policy, "is sufficiently flexible to combine the fiscal stimulus in the short term with consolidation of the public finances in the medium term."

Brussels had already launched action against Latvia, Lithuania, Malta, Poland and Romania in July following earlier procedures against France, Greece, Ireland and Spain.

The seven members said by a commission spokeswoman to have "done their homework" by remaining within the agreed scope are Bulgaria, Cyprus, Denmark, Finland, Luxembourg, Sweden and Estonia.

But of those only Sweden, which is not among the 16 countries using the euro, could point to economic growth in the second quarter of 2009 under new data also released Wednesday.

The commission expects average eurozone deficits to hit 6.5 percent of GDP in 2010, compared to 0.6 percent in 2007. Average debts are slated to reach 83.8 percent of GDP, against 66 percent in 2007.

Europe's most heavily indebted country, Italy, whose obligations are expected to amount to 115.1 percent of gross domestic product this year and 117.3 percent in 2010, foresees a public deficit this year of 5.3 percent.

However, "compared to deficits in other countries, the level in Italy is not among the highest," its finance ministry said in a statement.

"It is the European and world situation that is exceptional because of the (economic) crisis," it added.

The rate at which the eurozone economy shrank between April and June was, at 0.2 percent, twice the initial estimate, emphasising why eurozone and EU finance ministers cannot agree on 2011 as a target date for implementing "exit strategies" from their economic stimulus measures.

While the eurozone made such a pledge in Sweden last week, the full EU stopped short. Economic contraction for the EU as a whole was slightly worse.

"To go from early signs of recovery to saying it is time to act on deficits, absolutely not," said BNP Paribas analyst Clemente de Lucia, who warned of a boomerang effect on investment and consumption amid already high unemployment.

Almunia said action was "crucial at this juncture to ensure a smooth transition from the still fragile recovery to self-sustained, balanced growth, and to put public finances back on a sustainable path."

The latest data echoed increasingly cautious noises from the International Monetary Fund and World Bank meeting in Istanbul this week, especially as regards eastern European countries.

As thousands of Romanians protested against public service wage cuts there, Bulgaria said Wednesday it will likely postpone first steps towards joining the euro until early 2010 -- despite a zero deficit.

European Commission excessive 
deficit reports - briefing

2009 Annual statement on the euro area