EU cracks whip on budget offenders

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"This ... will allow the economic and budgetary policies of the member states to be monitored in parallel during a six-month period every year, so as to detect any inconsistencies and emerging imbalances," the EU ministers said in a statement.

STATISTICS

According to data from Eurostat, the statistical office of the European Commission, both government deficit and government debt in the euro area and the European Union soared in 2009, compared with 2008. There was also considerable drop in GDP.

In the euro area the government deficit as a ratio to GDP increased from 2 percent in 2008 to 6.3 percent in 2009, and in the EU deficit rose from 2.3 percent to 6.8 percent.

Government debt in the euro area increased from 69.4 percent at the end of 2008 to 78.7 percent at the end of 2009. In the broader EU government debt rose from 61.6 percent to o 73.6 percent.

It was reported that as many as twelve member states had government debt ratios higher than 60 percent of GDP in 2009. These countries were Italy (115.8 percent), Greece (115.1 percent), Belgium (96.7 percent), Hungary (78.3 percent), France (77.6 percent), Portugal (76.8 percent), Germany (73.2 percent), Malta (69.1 percent), the United Kingdom (68.1 percent), Austria (66.5 percent), Ireland (64 percent) and the Netherlands (60.9 percent).

The lowest deficits were recorded by Sweden (-0.5 percent), Luxembourg (-0.7 percent) and Estonia (-1.7 percent).
In all, 25 member states recorded a worsening in their government balance relative to GDP in 2009 compared with 2008, Eurostat said.

The Eurostat data also shows how government spending rose in the member countries in 2009. Government expenditure in the euro area was equivalent to 50.7 percent of GDP while government revenue was equivalent to 44.4 percent of the GDP. The figures for the EU were 50.7 percent and 44 percent, respectively.

In both zones, the government expenditure ratio increased between 2008 and 2009, while the government revenue ratio decreased. But that was predictable given the scope and depth of the worst recession the world witnessed in 60 years.

RECESSION

Bank bailouts across Europe and governments' fiscal measures to fight the recession led to unmanageable budget deficits, threatening the stability of the banking system and the future of the euro common currency.

European national governments stretched their finances to prop up failure-prone banking behemoths as the eventuality of massive bank failures would have worsened a crisis of confidence in the European banking system already reeling from the effects of the global banking turmoil.

From Dexia and Fortis to Britain’s' Bradford & Bingley, RBS, Lloyds TSB and HBOS, and from Danish bank Ebh to Germany's Hypo Real Estate, BayernLB and Commerzbank, the rescued European banks make a long list. Greece's National Bank, Iceland’s' Landsbanki and Kaupthing and Ireland's Anglo Irish Bank were also bailed out as the crisis unfolded.

According to a European Union document published last year, EU governments had approved a staggering $5.3 trillion in aid for struggling banks. Apart from this, governments across Europe unveiled unprecedented stimulus measures to prop up sagging economies and sustain jobs, creating gaping holes in fiscal discipline.

WORST OFFENDERS

The release of Eurostat data in late April, which showed that Greece's budget deficit in 2009 was a whopping 13.6 percent, triggered a fresh bout of negative sentiment in the market, leading to a ballooning of Greek bond yields. The ensuing crisis questioned the fundamentals of the common currency of the bloc.

Greece was not, however, the lone offender. The government deficits in percentage of GDP in Ireland was put at 14.3 percent while it was 11.5 percent in the United Kingdom, 11.2 percent in Spain, 9.4 percent in Portugal, 9 percent in Latvia, 8.9 percent in Lithuania, 8.3 percent in Romania, 7.5 percent in France and 7.1 percent in Poland.

As it negotiated a rescue deal by the EU members and the IMF, Greece promised to raise taxes and cut spending and wages to bring down budget deficit to by 8.7 percent of the GDP by this year. The government also promised it would bring down its deficit to the EU limit of 3 percent by the end of 2012. But the budget tightening measures led to violent popular protests across the country.

Ireland is still grappling with the bailout of nationalized lender Anglo Irish Bank. According to Ireland's central bank governor, the final bill for the bank bailout could hit 25 billion euros. Ireland's budget deficit ballooned to 14 percent of gross domestic product last year, the highest in Europe, mainly owing to the pressure of the bank bailout.

The EU ministers' agreement to subject national spending to broader scrutiny also gains significance in the light of Eurostat revelations in the past that some member states were not fully transparent in reporting their deficit data.

Eurostat has already made a case against Greece and Bulgaria on this account. "Eurostat is expressing a reservation on the quality of the data reported by Greece, due to uncertainties on the surplus of social security funds for 2009, on the classification of some public entities and on the recording of off-market swaps," the EU's statistical wing said in a report earlier this year.

Eurostat said in July the European Commission had some “worries” about the statistical data submitted by Bulgaria regarding its economy. In April Eurostat had objected to the budget deficit figure declared by the Bulgarian government and raised it from 3.7 percent to 3.9 percent of GDP.

BITTER PILL

However, the EU effort to strengthen economic governance across the bloc has attracted criticism, mainly on the ground that increased pressure on governments to clamp down on spending will depress growth and prolong the recession.

Joining the chorus of critics was Nobel Prize-winning economist Joseph Stiglitz, who said the focus on austerity will prolong the global downturn. He warned that European politicians were attracting a bigger crisis by promising to cut spending.

Greece and France have especially witnessed turmoil and social unrest as the governments went ahead with plans to cut spending and trim national budgets.

The issue was so divisive in nature that there were conflicting comments from Germany, Eurozone's largest economy. While foreign minister Guido Westerwelle objected to the proposals saying that national budgets were a matter of sovereignty, Chancellor Angela Merkel said she believed it was a positive move to crack down on irresponsible spending.

However, Britain's Chancellor of the Exchequer George Osborne said his county welcomed the new decision. "It is in everyone's interest that we have transparent information about other national budgets. We welcome new procedures," Osborne said.

EU Economic and Monetary Affairs Commissioner Oli Rehn said the move underscores European Union's commitment to the health of euro and the monetary union.

"I think it's important to underline that while we have stabilized the situation in the spring and during the summer concerning financial stability in the euro area, we are certainly not out of the woods yet and that calls for strong solidarity and strong commitment by all euro area countries with respect to the euro area and the euro," said Rehn.