ECONOMY

Six EU newcomers warned over deficits; no penalties will apply

BRUSSELS (Combined report) – The European Union’s head office issued its first warning yesterday to six new member countries about excessive budget deficits, but said the costs of joining the bloc would be taken into account when deciding on disciplinary action. In its first budgetary review of the 10 countries that joined the EU this month, the European Commission said six were above the deficit ceiling of 3 percent of gross domestic product: Cyprus, the Czech Republic, Hungary, Malta, Poland and Slovakia. In 2003, Poland’s deficit was 4.1 percent of GDP, the Czech Republic’s 12.9 percent, and Hungary’s 5.9 percent. Cyprus had a deficit of 6.3 percent of GDP while Slovakia and Malta ran deficits of 3.6 percent and 9.7 percent of GDP respectively. Three other newcomers – Slovenia, Latvia and Lithuania – were under 3 percent and Estonia had a surplus, he said. All 10 are committed to joining the euro single currency as soon as they meet the criteria, with the earliest expected in 2007. But some of those with larger deficits face the same sort of domestic pressure against spending cuts that can be seen in Germany and France and are sympathetic to calls for the EU’s budget rules to be applied with some flexibility. Although the fiscal discipline rules adopted ahead of the euro usually give budget sinners only one year to come back in line, the new EU finance commissioner, Joaquin Almunia, said that «it could be appropriate to allow for a multi-annual adjustment period» in the case of the six new countries facing difficulties. Although the Commission has been fighting old EU members Germany and France – so far with little success – over their persistent budget violations, Almunia noted the new countries would not be subject to the most severe sanctions because they were not yet using the euro. In addition, «the high level of the deficit upon accession and the structural shifts in the economy following accession could be a relevant factor» supporting leniency, he said. «There is no intention of using any penalties for any of these (new) countries,» he added. But he said the Commission expected all six to include time frames for correcting the problem in reports due in Brussels this week. «We expect these time frames to be realistic and in line with their ambitions to join the euro area over the medium term,» he said, adding that each country would analyzed separately. On Tuesday, the EU newcomers backed a ministerial decision to give Italy more time to bring its budget deficit below the 3 percent ceiling, rejecting the Commission’s recommendation for a formal reprimand. But Almunia’s shadow commissioner from Estonia, Siim Kallas, denied that the newcomers were looking for any general loosening of the so-called stability pact rules. «I don’t consider it necessary to change the basic criteria of the stability pact,» he said at a news conference with Almunia. «If we accept budget deficits, then this is very bad for our future.» (AP, Reuters)