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EU warns Spain, Slovenia pose biggest economic risks

10 April 2013, 16:57 CET
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(BRUSSELS) - The European Commission warned Wednesday that Spain and Slovenia pose the biggest economic risks and must quickly tackle excessive imbalances while France's growing debt was turning into the eurozone's "major challenge."

Spanish Prime Minister Mariano Rajoy said he had taken the Brussels "reprimand" on the chin but insisted that concrete results would feed through from further reforms due to be announced April 26.

Spain, where the banking system has already been bailed out, and Slovenia, favourite to become the sixth eurozone country to need a rescue, had "built up excessive macroeconomic imbalances," the worst rating of 13 EU countries reviewed, the Commission said.

With more bleak data out of Spain, the Commission said imbalances in debt, unemployment and growth were doing long-term damage, with more than 50 percent of under-25's unable to find a job.

"Our citizens are still paying the price for the unchecked development of imbalances in the past," said a Commission statement, noting especially "very high domestic and external debt levels" in Spain.

Spain needed to deliver a "decisive" reform programme, it said.

A "further contraction in economic activity, rising unemployment and the need for public support for the recapitalisation of a number of banks ... exposed the vulnerabilities represented by those imbalances for growth, employment, public finances and financial stability," it said.

Rajoy argued that the latest data painted a more favourable picture, citing for example renewed growth in inward investment even as he admitted the outlook for the jobless remained bleak.

"We have to keep up the reform effort," he said.

The report comes as Eurozone and EU finance ministers prepare for informal weekend talks in Dublin, likely to touch on everything from a tweak to the Cyprus bailout deal to a popular drive to clamp down on tax evasion.

Speculation about another eurozone bailout for Slovenia will be particularly hard to shake, especially as it struggles to stabilise a banking system saddled with mounting bad loans.

For Slovenia, "urgent policy action is needed to halt the rapid build-up of these imbalances and to manage their unwinding," the Commission report said.

The Slovenian finance ministry said in a statement that the government "agrees" with the Commission's analysis and that a fresh budget revision was planned and steps were being taken to deal with the banks.

New Slovenian Prime Minister Alenka Bratusek insisted on Tuesday after meeting Commission head Jose Manuel Barroso that her government was already working "day and night" to save a banking system the Organization for Economic Co-operation and Development says is in urgent need of repair.

"These risks are compounded by limited adjustment capacity in labour and capital markets and by an economic structure dominated by state-ownership," the Commission said.

Among the other 11 countries judged to be "experiencing macroeconomic imbalances" to a slightly lesser degree than Spain or Slovenia, France ran into some of the harshest words.

France's public debt "represents a vulnerability, not only for the country itself but also for the euro area as a whole," the report said.

"France is a core country -- in terms of its size and its geo-economic position," EU Economic Affairs Commissioner Olli Rehn said.

"Its health has a very direct impact on the overall health of the eurozone."

French public debt in 2012 was pegged at 90.3 percent of gross domestic product, above the EU average and half as much again as the notional 60-percent limit.

With the 17-nation eurozone economy facing continued recession this year, that represents "a major challenge that France still needs to address," the Commission said.

The other countries covered in the report were Belgium, Bulgaria, Denmark, Italy, Hungary, Malta, the Netherlands, Finland, Sweden and the United Kingdom.

All 13, picked last year as needing special attention, will have to present remedies this month for approval by the end if May under new rules giving Brussels more oversight over national economic planning.

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