A look at the mixture of scolding, praise, warnings and promises of cash offered by Brussels to different countries in its report
The European commission has given Spain an extra year to carry out one of the harshest deficit cuts seen in Europe and has offered the country a European rescue of its ailing banks.
Mariano Rajoy’s conservative, reforming People’s party government received a mix of glowing words, stern orders to continue reform and warnings about further trouble ahead as the economy slumps.
Encouraging words about Spain’s restructuring of its financial sector came with a warning that it will face further pressure as recession drags on and joblessness looks set to rise from 24%.
The commission’s report said: “The worsening of the macroeconomic outlook might require an increase in provisions, which would have an impact on the profitability of the banking system. In addition, given the risk of bank funding stress, further strengthening of the capital base of banks may be required.”
Spain’s banks have already been ordered over the past three months to set aside €82bn against toxic real estate. A further effort would probably see more of them forced to seek help.
Madrid was rapped over the knuckles on taxes, with the commission wanting fewer direct tax hikes and more indirect taxes. Higher sales tax now seems inevitable.
“Direct tax increases lead to a higher tax burden on labour and capital, which is considered to be particularly detrimental for growth,” it said. “Other tax increases which are considered to be less detrimental for growth, i.e. further increases in indirect taxation, have been explicitly excluded by the government.”
Spain was praised for raising retirement ages, but was told poor growth neutralises part of its pension reform, leaving the pension system in long-term danger.
“The worsening of Spain’s economic outlook is limiting the impact of the reforms,” the report said. “Indeed, Spain appears now to be at medium risk with regard to the sustainability of public finances in the long term.”
Reaction: The extended deficit-cutting deadline should have caused joy in Madrid, but there was no let up in the suffering of the eurozone’s fourth biggest economy, where borrowing costs continued to creep up towards bailout levels, with the news from Brussels providing only brief respite.
The proposal that Europe’s ESM bailout fund be used to aid banks directly provided a potential lifeline to Rajoy’s government as rumours grew that Spanish banks would need another round of recapitalisation.
Stock market at end of Wednesday: Madrid IBEX index: -2.6% at 6090.4
Brussels predicts economic activity will stay “subdued with growth of 0.5% this year before regaining momentum in 2013”. Its 1.7% growth forecast is weaker than the 2% projected by the UK’s own independent Office for Budget Responsibility. The commission praised government spending cuts, but raised several concerns: the UK’s shortage of affordable childcare, the boom-bust housing market, and the risk that spending cuts will conflict with the need to rebuild Britain’s crumbling infrastructure.
Reaction: Delays on some spending cuts and forecasts of growth next year are likely to keep protests at bay, but joblessness will stay high.
Stock market at end of Wednesday: FTSE 100: -1.7% at 5297
Brussels puts a positive gloss on every dire figure coming out of Ireland’s economy. Officials say it has made “important progress” despite being in recession and only keeping itself afloat with exports of food, pharmaceuticals and chemicals. It is expected to benefit from a surge in EU structural funds as it runs out of money to support its own infrastructure spending and prevent more young people leaving.
Reaction: The referendum on Thursday is expected to back austerity on the promise of further EU funds. Ireland will probably need a second bailout.
Stock market at end of Wednesday: The Irish Stock Exchange: -1.3% at 3,103
After last year’s near 7% contraction in GDP, the Greeks are not expected to to have a better time in 2012. On almost every measure, from public administration to the size of its hidden economy, Athens is at the bottom of the EU table. The silver lining, says Brussels, is the way government spending and business subsidies have been cut to the bone over the past two years. Now Athens must press ahead with structural reforms.
Reaction: An election next month could back the EU’s austerity plans on the promise of further bailout funds.
Stock market at end of Wednesday: FTSE Athex 20 : -3.7% at 185,51.
The commission says unemployment is set to rise and recession will last at least 18 months until the end of 2012. Rome is tackling civil service inefficiency, encouraging competition in protected markets and levying a wealth tax. Brussels also praises Mario Monti for a spending clampdown that has restricted the country’s debt to 120% of GDP.
Reaction: The Italian government will be pleased at the praise for its wide-ranging reform agenda, but no growth and higher unemployment will make it tough to push through reforms.
Stock market at end of Wednesday: FTSE Italia All-Share: -1.8% to 13,813.
Prime minister Pedro Passos Coelho must cope with an economy predicted to contract by 3.3% this year and an unemployment rate set to rise from 15%. Next year is expected to be a little better, although Lisbon is failing to tackle labour market restrictions and the huge costs of, and administrative barriers to, starting a business. Plans to limit youth unemployment, currently at 34%, have been praised.
Reaction: The economy is tanking and jobs are hard to come by; voters are relying on Brussels cash to bail them out.
Stock market at end of Wednesday: PSI 20: -1% at 4,518
The commission praises cuts in state spending, but warns that France will take a long time to hit the EU’s 3% annual deficit target. Welfare spending and gold-plated pensions are on the list of issues needing more attention. To generate jobs and growth it must end restrictive labour practices and protections that limit firms’ ability to hire and fire. Growth next year of just 1.3% after 0.5% this year.
Reaction: A socialist president will struggle to implement labour reforms while cutting welfare spending. Paris needs to tackle youth unemployment, which will mean watering down protection for older workers.
Stock market at end of Wednesday: The Paris CAC 40: -2.2% at 3015.