Financial Times
February 27, 2012
Last year, 13 eurozone countries surpassed the deficit to gross domestic product ratio of three per cent. The latest forecasts by the European Commission suggest the region is slipping into a mild recession this year. As a consequence, in the absence of further policy measures, most of these countries risk missing their budgetary targets. This especially applies to Spain, where last year’s deficit was eight per cent of GDP. The Commission expects its output to decline by one per cent this year (not a particularly pessimistic forecast) yet the country is still supposed to reach the three per cent deficit threshold by next year. Many other countries are in the same boat.
The dilemma for the EU – especially for the Commission whose surveillance role is being enhanced – is how to respond to this situation. Should Olli Rehn, the Commission’s vice president, push countries to take further immediate actions? Or should he recognise that these targets are out of reach and put emphasis on efforts rather than outcomes? From a structural point of view, the preferred option is clearly the latter. However, the European fiscal framework has lost a lot of credibility. He may wish to use the opportunity to demonstrate his ability to enforce discipline.
Economic history teaches us that financial crises have long lasting, if not permanent, negative effects . Most European countries have already lost several percentage points of GDP and it seems wise to expect the second recession to do the same. Mr Rehn has good reasons to require action. However, demanding adherence to the 2013 targets has two major drawbacks.
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