EU orders eurozone overhaul, puts Spain on critical list
Jose Manuel Barroso - Photo EC
(BRUSSELS) - The European Commission called for big changes throughout the eurozone on Wednesday as it placed Spain at the head of a critical list of 12 economies ordered to carry out major reforms this year.
The European Union executive said eurozone-wide bank deposit guarantees were now essential as investor concern homed in on wayward Spanish public finances, locked in a spiral of recession and massive unemployment.
As the Commission issued its annual report card on EU economies, Spain's debt risk premium smashed euro-era records -- hiking to almost 7 percent -- after the central bank chief quit early and Madrid scrambled to finance a major banking rescue.
If EU leaders endorse the report card at a June 28-29 summit, Spain might be given an extra year, until 2014, to meet its deficit commitments, sources said.
Spain was to bring its public deficit to within 3.0 percent of gross domestic product by 2013, from 8.9 percent in 2011.
Issued for the first time since the adoption of new laws dictating cross-border parameters for EU economic governance, the report allows the Commission to threaten eurozone countries with huge fines if they do not comply.
Model economy Germany, however, along with Bulgaria, was taken off the Commission's deficit blacklist, joining Estonia, Finland, Luxembourg and Sweden in the good books.
In detailed economic analysis assembled over months, Brussels also unfroze grants due to Hungary that were blocked earlier this year with the Commission unhappy at the state of Budapest's public accounts.
As economists increasingly tip a Spanish cry for financial help from its currency partners, Brussels issued policy demands, or recommendations, on all 27 EU states, as well as the 17-member eurozone taken together.
The aim is to try and police how individual governments act in an effort to re-boot growth.
With foreign investors running for the exit from Spain, hitting the country's banks and leading government borrowings to soar, the Commission said cross-border steps were required to prevent the eurozone imploding.
The Commission said the main steps towards "full economic and monetary union, including a banking union" would involve "euro area financial supervision and euro-area wide deposit guarantees."
This is something that hard-pressed Mediterranean states pushed for at talks among EU leaders earlier this month, but that Germany rejected.
In signs of big battles ahead, the Commission said that "this process will need to take into account legal issues such as treaty and constitutional change" across the bloc.
Spain and Cyprus -- which is deeply intertwined with the Greek economy -- were listed as being in "very serious" trouble unless there is prompt action both on public finances and on the economic levers the Commission says are most likely to generate wealth and create jobs.
The No. 2 and 3 eurozone economies of France and Italy were placed in a ward for "serious" problems, alongside Hungary and Slovenia, the EU highlighting problems stored up over public pensions or the fight against tax fraud.
Belgium, Bulgaria, Denmark, Triple A-rated Finland, Sweden and the United Kingdom -- which does the bulk of its trading with the eurozone -- were also identified as suffering from "imbalances," but the Commission maintained that across the 12 "none are currently excessive."
Existing bailout recipients Greece, Portugal and Ireland were simply told to implement agreements already struck with the EU and the International Monetary Fund.
The Commission said that on public finances, governments were "on the whole taking the necessary action to restore sustainability," but that unemployment, especially among the young, was "a severe problem."
It underlined: "Much greater action is needed across the EU to unlock our growth potential, create opportunities for business development, and unleash the job-creating potential of the services and energy sectors and the digital economy."
"Public finances are starting to improve and imbalances are beginning to be unwind," Commission head Jose Manuel Barroso said in pre-released comments as officials from all 27 EU states debated last-minute changes. "The direction is clear."
2012 country-specific recommendations in the context of the European Semester - guide
Conclusion of 12 in-depth reviews - correcting macroeconomic imbalances
Excessive Deficit Procedure recommendations on Bulgaria, Germany and Hungary - guide