The EU is trying to cover up for its sins by making a scapegoat of Greece. I don't usually agree with Greece but on this occasion Greece is right. It was France and Germany that insisted on the single currency implying a single exchange rate and a single interest rate. Yet they who were the first to brush aside their own rules. And now they are ganging up on one of Europe's smallest economies to prove that they are serious about the rules. Good job.
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EU states given stark warning on debt levels
By Tony Barber in Brussels
Published: November 8 2009 23:35 | Last updated: November 8 2009 23:35
The European Union's public debt could by 2014 rise to 100 per cent of gross domestic product – a year's economic output – unless governments take firm action to restore fiscal discipline, EU finance ministers will be warned on Monday.
The stark message is contained in a European Commission analysis, which highlights the rapid deterioration in EU public finances caused by emergency measures in the past 12 months to rescue Europe's financial sector and combat recession.
Finance ministers of the 16-nation eurozone will discuss the Commission's paper at informal talks on Monday evening and it will also be addressed at a meeting on Tuesday of all 27 EU ministers.
As recently as 2007, the euro area's public debt was only 66 per cent of GDP. But, even at this level, it was above the 60 per cent target set for countries aspiring to join the eurozone.
In its latest six-month economic forecast, published last week, the Commission predicted that the eurozone's public debt would rise to 84 per cent of GDP next year and 88.2 per cent in 2011. But the new document paints a more sombre picture.
The document says, based on projections of a return to long-term pre-crisis growth levels, that "without consolidation, the gross debt-to-GDP ratio for the EU could reach 100 per cent of GDP as early as 2014, and keep on increasing".
In spite of mounting concerns about the boom in debt, EU government leaders agreed at a summit on October 29-30 that the fragile nature of Europe's recovery made it advisable to delay efforts towards fiscal consolidation until 2011.
The latest paper backs this position, saying: "A financial meltdown and a generalised loss of confidence have been avoided. However, uncertainty remains high, and there are still risks of negative feedback loops between the financial sector and the real economy."
In a report published on Monday the Lisbon Council, a Brussels-based think-tank, recommends that EU governments cap expenditure at 2 percentage points below nominal GDP growth from 2011 onwards.
The Commission identifies five countries as at particular risk – Greece, Ireland, Latvia, Spain and the UK – because their public finances will come under strain from large increases in pension and healthcare costs, and high deficits triggered by the financial crisis.
This is particularly the case for Greece, which faces the second-highest increase in age-related expenditure in the EU, while its high debt ratio adds to concerns on sustainability.
Last week's Commission forecast estimated that Greece's public debt would hit 135.4 per cent of GDP in 2011, a level for which there is no precedent since the euro's creation in 1999.
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Brussels to rebuke Greece over budget deficit
By Tony Barber in Brussels
Published: November 10 2009 08:47 | Last updated: November 10 2009 12:00
Greece will be rebuked on Wednesday for doing too little to cut itsbudget deficit as impatience spreads across the European Union with thechaotic state of the Greek public finances.
The European Commission will distinguish Greece from other deficitoffenders – notably, France, Spain and the UK – by declaring that theauthorities in Athens have failed to comply with recommendations torestore fiscal order.
The reprimand is one of the strongest tools available to theCommission, which acts as the guardian of the EU's fiscal rulebook,known as the stability and growth pact. The ultimate punishment is theimposition of financial sanctions on a member state, a step the EU hasnever taken.
All 27 EU countries except Bulgaria are expected to have budgetdeficits next year in excess of 3 per cent of gross domestic product,the limit under EU rules for normal times.
But Greece annoyed several of its fellow eurozone members as well asthe Commission by concealing the true condition of its public financesuntil last month, when a new socialist government came to power andblamed the mess on its conservative predecessor.
The Commission first recommended in March that Greece should bedeclared to be running an excessive deficit. At that time, Commissionexperts estimated the Greek deficit would be above 3 per cent of GDPthis year and above 4 per cent next year – high, but not alarmingly so,given the impact of the global financial turmoil on European publicfinances.
After the new Greek government's revelations, however, the Commissionpublished forecasts last week putting the deficit at 12.7 per cent thisyear and 12.2 per cent in 2010.
Compounding the problem is the high level of Greece's public debt,which the Commission estimates will rise to 112.6 per cent of GDP thisyear, 124.9 per cent next year and 135.4 per cent in 2011.
Fitch credit ratings agency downgraded Greece's debt last month andMoody's put it under review for a possible downgrade. But in somerespects the reaction of financial markets to the bad news from Greecehas been restrained.
Yield spreads between Greek and German 10-year government bonds, whichrepresent the premium investors are prepared to pay for lower-qualityGreek debt, are at present about 140 basis points, half their level inFebruary. A basis point is one-hundredth of a percentage point.
Economists said this demonstrated how eurozone membership providedGreece with such secure shelter from financial turmoil that it mighteven reduce the incentive to cut public expenditure and take otherunpopular measures to restore fiscal discipline.
The Commission is expected to allow France and Spain one more year –until 2013 – to reduce their deficits to below 3 per cent. The UK willalso be granted one more year, until 2014/15 fiscal year.
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