Brussels, 06/02/2009 (Agence Europe) - On Tuesday 10 February, EU finance ministers will conduct a first horizontal assessment of national economic recovery programmes and their consequences for budgetary and structural policies. The recovery plans may have prevented the collapse of the financial system, but credit markets remain very fragile and the aim of ensuring lending to the real economy at normal price has not yet been achieved, states the Economic and Financial Committee (EFC) in a paper drawn up ahead of the Ecofin Council. This point must remain a priority at a time when pressure on public finances is growing under the effect of budgetary measures and the spread between government bonds.
In the light of the latest Commission forecasts, the total amount of support provided by budgetary policy to economic recovery in 2009 and 2010 is estimated at between 3% and 4% of GDP. Roughly a third of the increase is due to discretionary policies, and the effect of automatic stabilisers is estimated at 1.75% of GDP. Automatic stabilisers, which are particularly strong in Europe, lessen the economic effects, states' budgets automatically taking on a percentage of the difficulties. Given all of this, the average EU27 budgetary deficit should be around 4.8% in 2010, the highest level in the last 15 years. Budget support measures put in place since mid-2008 represent a change in the initial budgetary plans of some 1% of EU27 GDP, the EFC says, using the Commission analysis. These measures, which represent a mix of revenue and expenditure instruments, appear to be timely, as most of them are taking effect in 2009, and are, in part, temporary and targeted. “This suggests that political determination will be required to reverse the budgetary expansion once the crisis is over,” the EFC warns.
The responses from member states show significant differences, both in terms of approved measures and their budgetary impact, the EFC continues, noting a tendency among some to consider operations, such as capital injections, as adding to public debt but not to government deficit. So far, about 6% of EU GDP has been injected into the financial sector (as recapitalisation or liquidity support) and guarantees to the financial sector amount to around 19% of EU GDP, the EFC says. Consequently, debts and deficits are growing rapidly, to the extent that some countries are reaching a point where early fiscal consolidation, even in a period of low or negative growth, might carry less risk to the economy than waiting for economic recovery. Some degree of differentiation across member states, depending on the situation of each in applying the stability and growth pact and a coordinated strategy for returning to budgetary consolidation, will have to be applied, the EFC says.
With regard to structural reforms, healthcare and pensions must remain the priorities, but it must be ensured that the long-term measures without structural benefits can be reverted as and when appropriate. While most of the measures adopted are in line with the Lisbon programme, several reforms seek to limit the immediate impact of the slowdown. Communication on the economic situation and recovery efforts will be “extremely difficult” in coming months, the EFC notes. When the effects of the slowdown on growth and employment become fully visible, pressure will mount on governments to undertake additional costly support measures. Fiscal leeway is now much reduced, however. (A.B./transl.rt)