Despite big economic improvements, the EU Commission has demanded more reforms from member states
Growth has found its way back to Europe, public finances are stronger and even employment is on the rise. But major challenges still remain and all EU countries need to reform their economies, said the European Commission when presenting its economic recommendations for member states on Monday (02.06.2014).
Some countries have more work to do than others, though, in particular the new French government which faces a tough job ahead to make the country more competitive. The commission also concluded that Germans need to spend more at home, that Portugal must find new ways to cut expenditures and that Italy, despite letting drug dealers and prostitutes boost its economy, needs to decrease its debt and make its administration more efficient.
Compared to the situation a year ago, when the commission presented its last country recommendations, the European economy looks much brighter. But as before, EU leaders – including outgoing Commission President José Manuel Barroso – felt the need to remind the public that the crisis is not over.
In more concrete terms, Barroso said he wanted to see more policies to deal with the unacceptable high unemployment levels and to increase private investments and lending to companies, especially small and medium-sized businesses. Many countries that have relied on tax increases rather than spending cuts also need to broaden their tax base and decrease labour taxes, Barroso argued.
That’s the case with France, which has become an increasing source for concern in the euro area during the last couple of months.
France can still make it
France received a handful of recommendations from the commission, apart from the idea to lower its labour tax. Among them were suggestions to address its excessive deficit and its old-fashioned education system, along with a bad business environment and the weak French competitiveness.
Siegfried Top, a senior economist at the KBC Bank in Brussels, said French companies face major difficulties when competing with other international corporations.
However, Barroso believes in the new government and its economic programme that is intended to decrease public spending by 50 billion euros in the coming years. If applied properly, France could meet its European economic obligations, he argued.
France could also get some support from other EU countries, namely neighbouring Germany, which has repeatedly been asked to increase its domestic demand. Germans have jobs and money and should spend more at home, the commission argued, something which could strengthen declining French exports. France could also benefit if the European Central Bank decides to lower the interest rate this week. That could push down the value of the euro and also give a boost to French exports. Other countries, like Italy, use other means to stimulate their economies.
Drugs and prostitution boost
The surprisingly big support for the Italian government and Prime Minister Matteo Renzi in the European elections has created political and thus also economic stability. However, Italy still faces major challenges and needs to modernise its economy. The debt is still very high and the deficit, although below the EU maximum target of 3 percent, is growing. In order to reduce the deficit and give the government some more room for spending, Istat, the country’s main supplier of official statistical information, will start to include drug trafficking and prostitution in the GDP figure. Top of the KBC Bank doesn’t believe in such an artificial boost.
However, Italy is not alone in including parts of the black market in its GDP. The UK also uses the same strategy to boost the British economy.
First assessment of former crisis countries
The commissions’ country recommendations did not include member states currently receiving support from the EU and the International Monetary Fund, in this case Greece and Cyprus. But since last year’s assessment two crisis countries have left their EU/IMF support programmes: Ireland and Portugal.
The commission recognised improvements in Ireland, where the government has reduced its deficit, recapitalized banks and improved the fiscal rules. But challenges remain, including the concern of high public debt and youth unemployment, among other things. A similar assessment was made for the Portuguese economy.
Both countries received credit for exiting their EU austerity programmes without asking for further support. That can be seen as a sign of strength in their economies, but it can also be dangerous if it doesn’t work, said Top.
