Wednesday, May 13, 2009

Poland, Romania face EU budget discipline steps

By Marcin Grajewski
BRUSSELS, May 13 (Reuters) - The European Union's executive arm launched disciplinary action on Wednesday against Poland, Romania, Lithuania and Malta for letting their budget deficits rise above the bloc's ceiling.

The EU's excessive-deficit procedure may in theory lead to fines for euro zone countries that persistently top the EU's budget deficit ceiling of 3 percent of gross domestic product, or a freeze in EU aid funds for non-euro zone EU members.

But the European Commission has made clear it would avoid any drastic steps as long as the economic crisis lasts and give budget sinners generous deadlines to correct fiscal shortfalls.

The Commission expects 21 out of the EU's 27 countries to have their deficits above 3 percent of GDP as recession cuts state revenues and growth-boosting measures empty its coffers.

"Many EU countries are presently facing budget deficits above 3 percent on account mostly of the economic recession, which brings about declining tax revenues and rising unemployment benefits," EU Monetary Affairs Commissioner Joaquin Almunia said in a statement.

Having a deficit below 3 percent of GDP is also a criterion for adopting the euro, which Poland wants to achieve in 2012.

The Commission is expected to propose deadlines to bring the deficits beneath the EU's ceiling next month for the four countries. They joined the EU in 2004 or 2007 and remain outside the euro zone except for Malta.

Other countries that had recently faced the EU's budget discipline action received longer deadlines than the traditional one year. But the Commission insists EU members must tighten their belts once the recession is over.

"This is key to preserve the sustainability of public finances in the medium to long term," said Almunia.
The Commission says Poland, the biggest of central European EU newcomers, will see its deficit balloon from 3.9 percent last year to 6.6 percent in 2009 and 7.3 percent in 2010, making it difficult to meet the euro entry criterion on time.

"The reduction of social contributions, an increase in personal income tax reliefs for families, a generous indexation of pensions and of social benefits increased the deficit in 2008," the Commission said of Poland.
Poland's government is adamant that the deficit would be lower than forecast by the Commission, but does not give precise figures.

Romania's deficit is seen at 5.1 percent of GDP this year and 5.6 percent next, compared with 5.4 percent last year.

"The breach of the threshold mainly reflects significant slippages with respect to current spending, notably on public wages and social benefits as well as overly optimistic revenue projections," the Commission said of Romania.

Lithuania, among the hardest hit by the economic downturn, is forecast the see its deficit swell to 5 percent of GDP this year and 8 percent in 2010, despite recent austerity measures.

The Commission has already launched disciplinary steps against France, Spain, Greece, Ireland and Latvia.
It gave France and Spain until 2012 to correct their deficits, backed a 2013 deadline for Ireland, but told Greece to reduce its shortfall by the end of next year. (Editing by Jan Strupczewski/Dale Hudson)

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