France and Spain Fall Short of Budget Targets as Euro Zone Debt Swells
BRUSSELS, April 22 (Reuters) – France and Spain failed to meet their budget deficit goals in 2014, with debt levels rising across the euro zone. However, there are indications that the pressure on Paris and Madrid to implement severe spending cuts may be easing.
According to Eurostat, the EU’s data office, France recorded a deficit of 4.8 percent of its economic output, surpassing its target of 4.5 percent. Spain, on the other hand, had the largest shortfall in the EU.
The implementation of strict austerity measures has been widely criticized as contributing to a second consecutive year of economic recession in the region. Olli Rehn, the EU’s leading economics official, has recently suggested that more flexibility in meeting economic targets is necessary. European Commission President Jose Manuel Barroso has echoed this sentiment, stating that austerity has reached a point where it lacks popular support.
While austerity measures have formed the basis of the euro zone’s strategy to address the three-year public debt crisis, they have also resulted in a vicious cycle where governments cut spending, businesses lay off employees, consumers reduce spending, and young people struggle to find employment.
High levels of unemployment and instances of violence in southern Europe have prompted a reconsideration of the approach, with a shift towards economic growth strategies.
Despite implementing cuts and tax hikes, Spain’s budget deficit (excluding bank recapitalization) stood at 7.1 percent, higher than the government’s official year-end assessment of 6.98 percent and exceeding the original target of 6.3 percent. When factoring in the cost of recapitalizing Spanish banks and the 40 billion euro ($52 billion) bank bailout from the euro zone, the country’s deficit for 2012 was almost 11 percent, surpassing the European Commission’s estimated 10.2 percent and higher than the 9.4 percent deficit recorded in 2011. Spain’s deficit was the highest in the EU, surpassing even Greece.
Eurostat data also revealed that the euro zone’s combined sovereign debt burden reached a record 90.6 percent of GDP in 2012.
The End of Austerity?
However, despite the challenges, there is a growing recognition that austerity measures need to be reevaluated. The euro zone as a whole has made progress in reducing its fiscal deficit, which stood at 3.7 percent of GDP in 2012, compared to 4.2 percent in 2011 and 6.5 percent in 2010.
As a result, Spain and France are expected to receive more time to achieve the EU-mandated target of 3 percent.
Jose Manuel Barroso highlighted the need to strike a balance between correcting public finances and implementing growth-oriented measures. The European Commission will decide on May 29 whether to recommend to EU finance ministers that Paris and Madrid be given until 2015 to reduce their fiscal gap to 3 percent of GDP, a target currently set for 2014.
It remains to be seen how substantial the policy change by EU policymakers will be. Olli Rehn, the EU’s commissioner for economic and financial affairs, has indicated that the group of 20 economies advocating for lesser austerity measures are simply preaching to the converted.
Rehn is increasingly focusing on countries’ structural financial efforts, which involves considering the effects of the business cycle and one-off measures on budgets.
However, Germany and the European Central Bank are inclined to see the euro zone prioritize addressing its financial situation after a decade of increased borrowing and rising debt and deficit levels in member countries.
Furthermore, the EU’s Monetary Compact treaty, signed by all EU nations except Britain and the Czech Republic in March 2012, mandates governments to balance their budgets or achieve a surplus while keeping the structural deficit below 0.5 percent of GDP.
Jurgen Michels, an economist at Citigroup, believes that there has yet to be a significant shift and that austerity remains a necessary measure. He predicts that many countries will need to adopt additional substantial fiscal measures to meet their revised targets.
