Cuts to EU budget gaps to begin in 2011

Deep cuts to budget gaps in the European Union should start in 2011 at the latest if forecasts next month show stable growth, …

Deep cuts to budget gaps in the European Union should start in 2011 at the latest if forecasts next month show stable growth, EU finance ministers agreed, but France said November was too early to make such a call.

The EU's executive arm, the European Commission, will issue growth forecasts for 2010 and 2011 for each country in the 27-nation region on November 3rd.

The ministers want all EU members to start reducing budget deficits if the forecasts show growth is strengthening and self-sustaining. The recession in some cases has inflated such gaps to more than four times the EU limit of 3 per cent of GDP.

While it is too early to withdraw government help to the economy now, ministers said, a plan to roll back the stimulus measures at some point, such as 2011, is necessary to retain policy credibility with financial markets and consumers.

"Provided that the Commission forecasts continue to indicate that the recovery is strengthening and becomes self-sustaining, fiscal consolidation in all EU member states should start in 2011 at the latest," conclusions of the ministers' meeting, obtained by Reuters, said.

The conclusions said allowances should be made for country-specific circumstances, as not all EU states will grow at the same pace. However, countries already deep in debt should start consolidating next year, they said.

Most countries will have to make deficit cuts well above the benchmark 0.5 per cent of gross domestic product annually in structural terms envisaged by EU budget rules, the conclusions said.

But France, the euro zone's second-biggest economy, stressed the conditionality of the 2011 deadline on economic growth and said November 3rd was too early to decide on deadlines.

"Exit strategies should be implemented in 2011 if the situation in terms of growth stabilises ... There is an 'if'," French economy minister Christine Lagarde told reporters after a meeting of euro zone finance ministers yesterday evening.

"This has to be done gradually. It will be a bit too early to talk about it in November."

EU finance ministers have given France, like Spain and Poland, until 2012 to bring its budget gap below 3 per cent. Greece has been given a 2010 deadline.

But France expects its overall public deficit to reach 8.2 per cent of GDP in 2009 and rise further to 8.5 per cent in 2010.

The 2012 deadline therefore seems unrealistic and diplomats said euro zone ministers questioned Ms Lagarde yesterday evening about France's efforts to meet it.

"France constitutes one of the major fiscal problems in the EU," an EU source close to the ministers' meeting said.

Greece, after a change of government, has almost doubled its deficit forecast for this year to more than 10 per cent of GDP from a previous estimate of 6 per cent, angering euro zone peers and EU Monetary Affairs Commissioner Joaquin Almunia.

"These serious discrepancies will require an open and deep investigation of what has happened," Mr Almunia said yesterday, recalling Greece had already revised up its budget deficit data several times previously.

The European Commission has started disciplinary steps against 20 EU countries for running budget gaps above 3 per cent.

Reuters