EU Commission warns Spain, Italy that budgets risk breaking rules aimed at controlling debt

BRUSSELS – European Union officials warned major economies Spain and Italy that their budget plans risk breaching EU rules aimed at keeping deficits and debt under control.

For the first time, the EU’s executive commission is reviewing draft budgets before national legislatures pass them. The review is aimed at getting ahead of budget troubles and preventing them from undermining the shared euro currency.

Italy, the No. 3 economy in the 17-country eurozone, was cited Friday for missing its debt reduction goal for next year. Spain, the No. 4 economy, was warned its deficit would just barely breach the figure agreed with the commission.

The commission said in a statement that it now “invites” officials and legislators in the affected countries to take steps to bring their 2014 budgets into compliance with the rules. Smaller euro members Finland, Luxembourg and Malta were also cautioned.

The warning for now doesn’t carry any penalties. Olli Rehn, the European Union’s economic and monetary affairs commission, said the review was “much more about partnership than penalties.”

Though Italy’s proposed deficit is within the limit at 2.7 per cent of GDP, the country fell short on reducing its large debt pile from past years. Italy had applied for an exemption for spending on long-term investment projects co-funded by the EU and aimed at increasing growth — but the commission turned that exception down.

Italian Economy and Finance Minister Fabrizio Saccomanni insisted that the country took the prescribed limits seriously and that debt had risen in part because of measures to pay down debt owed by local governments.

He said new sources of revenue such as privatizations would improve the debt picture — and allow Italy to qualify in the end for the investment exemption.

“It is not necessary to change the budget,” he said. “We know that it is necessary to send a strong signal.”

The commission predicted Spain would have a deficit of 5.9 per cent of economic output, just above the agreed target of 5.8 per cent. Spain’s Finance Minister Luis de Guindos said that “Spain is absolutely committed to the public deficit target” and predicted it would reach it in the end with measures already approved.

The EU rules, on paper, limit countries to deficits of 3 per cent of annual economic output and debt of 60 per cent of output. They were widely violated during the debt crisis that began in 2009, so the Commission has been pressing countries to get their finances in order — but trying not to push so hard that austerity hurts economic growth.

The rules, which date to before the introduction of the euro in 1997, were toughed in 2011 and 2013 after debt levels grew to unmanageable levels in several eurozone countries, threatening the currency union with breakup.

If countries wind up actually breaking the rules, the commission can put them on a recovery plan, called an excessive deficit procedure, that aims to gradually guide them back to full compliance. Thirteen of the eurozone’s 17 members are currently on such a plan. If the violations persist, financial penalties of up to 0.2 per cent of GDP are possible.

Countries that piled up so much debt they had to be bailed out with the help of the other eurozone countries were not included in the review. That is because they are already subject to EU monitoring. They are Ireland, whose financial support ends Dec. 15, Cyprus, Portugal and Greece.