Budget and public finances

On 23rd April, the Dutch government collapsed after it failed to agree a new austerity package, with Prime Minister Mark Rutte resigning. Rutte had been attempting to secure a deal with his coalition in order to reduce the country’s budget deficit to 3% of the GDP, in line with EU rules. Although the Netherlands has a low level of debt, and is one of the few EU countries to maintain an AAA credit rating, its economy is back in recession and it budget deficit is currently around 4.6% of the GDP.

But talks were abandoned when eurosceptic Geert Wilders and his populist PVV party, a coalition partner of Rutte’s conservative-liberal VVD, walked out, claiming that “a slavish adherence to European rules was foolish and would harm the Dutch economy.” Thus the coalition government fell. European Commissioner Neelie Kroes, who is a VVD member, described Wilders as hypocritical, as the Netherlands had been one of the countries most vociferously advocating a 3% deficit limit. She said, “ Pointing to Brussels now is dumb, it’s untrue, it’s distracting and it doesn’t solve anything.” [1]

Just four days later, Romania’s government also collapsed, when Prime Minister Razvan Ungureanu lost a no-confidence vote after just 2 months in office, amid public protests at severe spending cuts. Neil Shearing, chief emerging markets economist at Capital Economics, said that while the fall of Ungureanu’s government raised wider concerns, it should be noted that Romania has a history of fragile governments, and therefore comparisons with the situation in Holland should be made with caution.  [2]

But as two countries find themselves in political and economic turmoil, the message is clear: people are beginning to tire of austerity. The fall of these two governments, along with France electing the “soft-on-austerity” François Hollande, would seem to suggest that Europe will soon see a collision between those who believe austerity to be the answer, and those who don’t.

Image source: European Commission

There are tough times ahead for Spain as the government announced €27bn of spending cuts in one of the most stringent austerity plans in the country’s history. Among other measures, civil sector wages and unemployment benefits will be frozen, and electricity and gas bills will rise. Spain is in dire straits financially, with a huge deficit, an economy that returned to recession this year, and an unemployment rate of almost 23% - the highest in the European Union. It is fervently hoped that this plan will pull Spain out of this financial mire and prevent it from requiring a bailout, as this could be utterly catastrophic for the Eurozone. Spain’s economy is the fifth biggest in Europe, twice the size of that of Portugal, Greece and Ireland put together, and many fear that if it goes into meltdown, it will take the Eurozone down with it.

The cuts sparked protests across the country, with demonstrations turning violent in some cities, and a general strike was held on 29th March. Yet some fear that these cuts, extreme as they are, will not be enough, and that the Spanish government will be forced to implement further austerity measures later in the year.

Image source: enric borràs on flickr

There was further bad news for the beleaguered eurozone on 13th January when 9 of its countries saw their credit rating downgraded by top ratings agency Standard & Poor’s, causing the Euro to fall to a 17-month low. Spain and Italy dropped by two points, putting the latter at the same rating as Kazakhstan, Austria lost its top rating, and Cyprus and Portugal were downgraded to “junk” status, which means that debts are unlikely to be paid in full. Of the Eurozone nations, stable outlooks were predicted for only Germany and Slovakia. But the big news, of course, was that the second largest economy in Europe, France, lost its top AAA rating.

“It’s not good news, but it’s not a catastrophe,” claimed French Finance Minister François Baroin. But it’s certainly something of a disaster for Nicolas Sarkozy, with a presidential election looming and him lagging behind Socialist candidate François Hollande in the polls. Also, rather embarrassingly, he had stressed in the past how important the AAA rating was to France. Sarkozy is also probably somewhat aggrieved that Britain, who’s recent veto of financial treaty changes so infuriated him, for now keeps its top rating.

This news shows European leaders that they still have much work to do. The agency stated that it views measures taken so far to combat the crisis as insufficient, and that that they demonstrate “only a partial recognition of the source of the crisis”.

Image: Flickr/by Mattingham http://www.flickr.com/photos/mattin...

This is the amount EU leaders have just pledged to spend on energy and broadband internet infrastructure. In late January, the Commission proposed to redistributed €5 billion of unspent agricultural funding from the previous year. Member states criticized the reallocation as initially proposed, disagreeing over which projects deserved funding. The initial proposal had set aside a smaller amount for energy projects, but pressure and more projects increased the amount. The plan still needs to be approved by the European Parliament.

Image: www.flickr.com /jepoirrier

The European Commission should publish this Wednesday 23 July several reports accusing Bulgaria, and to a lesser extent Romania, for the inefficiency of their fight against corruption and for the poor administration of European funds in both countries. These official reports could lead to the freezing of a certain number of European funds provided to Bulgaria, particularly in the framework of the programmes PHARE, ISPA and SAPARD – unless the Bulgarian government manages to convince the Commission that it has implemented strict measures aiming at reversing the trend. However, the parties of the opposition have begun an offensive procedure against the running government, and the vote should take place the 24th, the day after the offical publication of the reports. Should the government fall, a difficult period for the relations between Bulgaria and the reste of the Union could begin.