Given the uncertain economic situation, the European Commission is now calling for the aggregated budgetary orientation of the Eurozone to be focussed on expenditure increases in 2017 of 0.5% of GDP.
This slightly expansionary budgetary orientation would correspond to a stimulus of around €50 billion, the European institution states in the specific communication it presented on Wednesday 16 November, at the launch of the “European Semester” budgetary process for 2017. According to the Commission, a pragmatic and prudent objective of this kind should make it possible to reduce unused productive capacity, help to push inflation upwards and avoid overheating the economy.
This is the first time that the Commission has recommended a budgetary policy geared slightly towards expansion, commented Commissioner for Economic and Monetary Affairs Pierre Moscovici, who firmly believes that by making recommendations at the level of the Nineteen, the European institution is acting as a Eurozone finance minister. He justified the European institution's position by pointing out that since the crisis, there has been strong budgetary consolidation (the average public deficit in the Eurozone was trimmed from -6% to -2% of GDP in 2015 and is expected to reach -1.7% in 2017) and that many citizens feel that they are losing out in the current economic climate.
Noting the diversity of national budgetary situations, the Commissioner said that countries, such as Germany, which have some budgetary margin should be investing more, whilst countries in an excessive deficit situation, such as France and Spain, should focus on keeping their commitments. The Commissioner promised an animated debate on the issue when it is addressed by the Eurogroup, on Monday 5 December.
The S&D group at the European Parliament immediately welcomed the new guidelines. Its chair, Italy's Gianni Pittella, described it as a "huge change in terms of approach" on the part of the Commission, which will open the door to investments. "The clock for austerity is ticking", he added.
Kicking off the 'European Semester' budgetary process for 2017, the Annual Growth Review reaffirmed the relevance of the triptych underlying the socio-economic policy mix at European level. Commissioner for the Euro Valdis Dombrovskis, referred to the virtuous triangle formed by stimulating investment, pressing on with structural reforms and maintaining responsible budgetary policies. For the first time since the crisis, all Eurozone countries will see positive growth in 2017, he noted, with growth in Greece expected to stand at 2.7% of GDP.
On the social front, Commissioner Marianne Thyssen said that thanks to the priorities laid down, Europe was on the right track. Since the crisis, 1.6 million young people and 2 million long-term unemployed have found work and, with an announced employment rate of 71%, the EU should be set to achieve its target of an employment rate of 75% in 2020, she observed. The fact remains that the sluggish recovery (1.5% of GDP for the Eurozone in 2017 as the Commission predicts) (see EUROPE 11664) - has not helped to reduce social inequalities. The Commissioner stressed that 119 million people are at risk of poverty. In 2015, around 25 million children - or 26.9% of the population under 17 years of age - were under threat of poverty or social exclusion, according to the statistical office of the EU (Eurostat).
Draft 2017 budgets: eight Eurozone countries may breach Pact
On Wednesday, the Commission also presented its opinions on the draft budgets for 2017 of eighteen countries of the Eurozone, with Greece still coming under a specific financial bailout plan. The drafts of six states with a public deficit of less than 3% of GDP (Belgium, Italy, Cyprus, Lithuania, Slovenia and Finland) are at risk of breaching the Stability and Growth Pact, as are those of two states (Spain and Portugal) which are under an excessive deficit procedure.
Italy, which is already benefitting from the flexibilities laid down in the budgetary rules, wishes to commit additional spending - at a level of 0.4% of national GDP - to deal with the continued influx of refugees arriving in its territorial waters and to carry out reconstruction work in the regions hit by earthquakes (see EUROPE 11657).
We will take this into account, Moscovici pledged, referring to an intense dialogue with the Italian authorities, which are keeping up the pressure on their European partners by linking this dossier to the adoption of the mid-term revision of the multi-annual financial framework (see other article). Although the draft Italian budget is unlikely to be rejected out of hand, the Commissioner nonetheless noted persistent gaps with the commitments previously made by Italy and which could lead to a significant deviation from the medium-term adjustment trajectory. The Commission is soon to publish a report on Italy and Belgium's compliance with the debt criterion.
The Italian authorities received considerable backing in the European Parliament from the newly re-elected chair of the EPP group (see other article), Germany's Manfred Weber. Italy is facing additional costs and the Commission needs to take these into account, he said.
The Commission also has Spain and Portugal, which are located in the 'corrective' plank of the Pact, in its sights. For Madrid, the European institution takes the view that the draft Spanish budget submitted before the formation of the new Rajoy government will not meet either the interim deficit reduction objective (-3.1% of GDP in 2017 and -2.2% in 2018) or the required budgetary effort in structural terms. The Spanish authorities have pledged to send in a revised draft budget in the coming weeks, which will feature savings in the order of €5 billion.
As regards Portugal, whose deficit needs to be brought below the 3% of GDP mark at the end of 2016, the Commission finds that the draft Portuguese budget for 2017 just about clears the threshold of a significant deviation from the agreed trajectory. "The risks are therefore under control, as long as the necessary budgetary measures are taken", the European institution stresses. Noting that ongoing growth has been observed in the country in the third quarter, (+0.8% of GDO), Moscovici seems to be contradicting the opinion of Dombrovskis, who believes that additional measures will need to be taken.
Despite the risks identified, the Commission has decided to suspend the excessive deficit procedures in place for the two Iberian countries. In view of the staunch opposition of the European Parliament (see EUROPE 11663), it has also decided to call a halt to the procedure leading to a freeze of the cohesion funds for both of these countries for 2017 on the grounds of insufficient compliance with the Pact between 2013 and 2015 (see other article). (Original version in French by Mathieu Bion)