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EU: European Commission Says Public-Sector Costs Undermine Economies

Pedro Solbes, the European Union's commissioner for monetary and economic affairs, issued a strongly worded warning to Germany, France, and Italy yesterday to act on their burgeoning budget deficits. He indicated that "unsound" levels of public expenditure in the EU's largest economies and delayed structural reforms seriously undermine the bloc's economic potential and leave it unable to close the gap with the United States.

Brussels, 9 January 2003 (RFE/RL) -- Three years ago in Lisbon, the 15 European Union member states promised to turn the bloc into the world's most competitive economy by 2010. Today, far from catching up with the United States, the EU is unable to pull its weight in the global economy should growth across the Atlantic falter.

A series of reports released yesterday by the European Commission show that economic growth in the EU is likely to remain sluggish for the foreseeable future if governments do not reel in growing public-sector costs and continue putting off vital structural reforms.

Pedro Solbes, the EU's commissioner for the economy, yesterday warned the three largest euro-zone economies, Germany, France, and Italy, that they cannot "spend their way out of the slowdown," adding that short-term benefits of expansionary budgets would be outweighed by medium-term costs.

Solbes yesterday gave Germany four months to present a program for reducing its budget deficit from 3.8 percent of gross domestic product in 2002 to under 3 percent this year, as required by the Stability and Growth Pact underpinning the euro.

This is the second warning for Germany and could lead to financial sanctions if other EU governments endorse it, although Solbes downplayed the threat yesterday. "We're asking Germany to reach a situation below 3 percent next year. If this [does not] happen, we have to apply the regulation of the treaty, [and] the regulation of the treaty does not imply any kind of immediate fine. There's a second recommendation, and that is a long process. But I think it is excessively too early to start speaking of these kinds of questions today," Solbes said.

Germany, which itself had pushed for as strict a stability pact as possible in 1999, now has a foreign-debt level that exceeds the 60 percent-of-GDP limit allowed by the treaty.

The European Commission's analysis savaged the entire substructure of the German economy, describing it as "highly vulnerable" to external shocks and unable at this point to generate durable growth. It also notes "a need for urgent reforms" in the labor market and social-security and benefit systems, as well as recommends a reduction of the regulatory burden on the economy.

In slightly kinder terms, France and Italy were also warned that they are close to breaching the 3 percent budget-deficit ceiling this year. France's debt levels hover dangerously close to the allowed 60 percent, whereas Italy's debt is already at more than 100 percent of its GDP.

According to a commission forecast, the German economy cannot expect to grow by more than 1.5 percent this year, and growth in France and Italy is also unlikely to be above 2 percent.

Solbes yesterday also implicitly criticized the recent attempts by German Chancellor Gerhard Schroeder to try to balance his books by raising taxes. "We think that it's always better to reduce expenditure to try to reduce public deficit. Of course, the utilization of increased taxation depends very much on the point of departure of the fiscal burden in every member state," Solbes said.

Elsewhere, Solbes had noted that fiscal pressure has already reached dangerously high levels in the three countries singled out for criticism.

Looking ahead, Solbes admitted that the more flexible U.S. economy will outperform the EU for the foreseeable future.

Worse still, he also raised the prospect of a European recovery being delayed for months, if not longer, pointing to deteriorating consumer demand, increasing oil prices, and the strengthening of the euro. The situation is complicated by tensions over Iraq, whose effects on the EU are "impossible to predict."