EU Sees Half of Euro Zone Breaking Deficit Rules in 2004

Presenting the commission's latest economic forecasts in Brussels, EU Monetary Affairs Commissioner Pedro Solbes said half of the 12 countries using the euro could break the budget rules, which stipulate keeping deficits under three percent of gross domestic product.

Solbes said Germany, France, Italy, the Netherlands, Portugal and Greece, which together account for 80 percent of the euro-area economy, were having difficulty with their budget deficits and that the situation was being aggravated by poor growth.

"We have to acknowledge the hard truth that the EU economy is not participating fully in the positive global economic performance," Solbes said at a press conference. "The balance of risks appears to have shifted toward the downside in recent months."

Solbes forecast growth for the euro zone in 2004 of 1.7 percent compared to 4.2 in the United States and Japan. He blamed part of Europe's growth problems on governments failing to implement necessary economic and labor market reforms. "The problem is not the strategy but the implementation," said Solbes.

Germany and France, the two largest euro-area economies, have fallen afoul of Brussels by flouting the three percent limit for two years in a row. At a meeting of EU finance ministers in November they effectively suspended the EU's budget rules by rebuffing a call by the commission to bring their deficits back under the limit. Both are likely to breach the limit again in 2004. That four more countries will join Germany and France in breaking budget rules this year highlights just how bad things are for the continent.

Netherlands crosses the line

The Netherlands was once considered an EU poster child for fiscal restraint, but the commission's report said new figures showed the country had a 3.2 percent budget deficit last year. That will cause Brussels to begin monitoring the Dutch budget plans more closely under the EU's "excessive deficit procedure."

Britain also clocked in at 3.2 percent in 2003, but since it is not part of the euro currency zone, it cannot face disciplinary action from Brussels. The situation is more precarious for Italy, with its deficit forecast to climb to 4 percent in 2005 from 3.2 percent this year.

"In Italy, the budgetary situation is clearly deteriorating," Solbes said, according to Bloomberg News. "In a medium-term perspective the Italian situation looks even more worrying."

Solbes also expressed concern over France's budget deficit, which is expected to breach the bloc's limits for the fourth consecutive year in 2005. The commission said the French deficit would likely shrink "only marginally," to 3.6 percent in 2005 from 3.7 percent in 2004 and 4.1 percent in 2003.

In contrast, Solbes, who is leaving his post in Brussels to become the Spanish finance and economy minister, had mostly positive words for Germany. He said there were signs Berlin might be able to get its deficit back under the three-percent limit in 2005.

"Germany is heading in the right direction to be able to keep to the November recommendations of the Ecofin council," he said, adding the German deficit could dip to 2.8 percent in 2005 so long as prospects for growth did not worsen.