EC report highlights lack of fiscal governance and acute challenges facing the euro area

As European finance ministers prepare to meet again to discuss the deepening euro zone crisis, the latest quarterly report from the European Commission highlights the uneven nature of the economic recovery from the recession.

It says that although the recovery remains on track growth is expected to slow down and will remain uneven across member states as turbulence in euro area sovereign markets has remained high in the first half of 2011.
 
And it points out that fiscal frameworks in the euro area need to be tightened as improvements started in 1990 seem to have stalled and fiscal governance remains weak in some member states.

‘Despite the utmost resolve of policymakers and a string of ambitious and far reaching policy measures, some euro area sovereigns continue to face acute challenges,’ said Marco Buti, EC director general for economic and financial affairs.

‘Greece in particular remains in the eye of the storm. It has become clear that the path leading to renewed market funding access is less smooth than expected at the signing of the first financial assistance programme in May 2010. The fourth joint review mission to Greece in May 2011 concluded that, overall, significant progress has been achieved during the first year of the adjustment program, in particular in the area of fiscal consolidation,’ he explained.

‘However, reinvigoration of fiscal and broader structural reforms is necessary to further reduce the deficit and debt and achieve the critical mass of reforms needed to improve the business climate and pave the way for sustainable economic recovery. Efforts to frontload the use of structural funds for growth supporting investments and stepped up technical assistance are being prepared by the Commission to contribute to this process,’ he added.

He pointed out that at the European Council summit of 23/24 June 2011, heads of state reiterated that everything necessary to ensure the financial stability of the euro area will be done and they have called on Greek authorities to continue implementing with resolve the necessary adjustment efforts to put the country on a sustainable path.
 
On 28/29 June the Greek Parliament adopted key laws on fiscal and economic reform strategy and privatization in a vital step towards long term reform and consolidation. This, said Buti, also safeguards the disbursement of the July instalment under Greece's first financial assistance programme, which the Eurogroup approved on 01 July.
 
‘Furthermore, it lays the foundations for a second programme. The European Council has agreed an approach for private sector involvement through strictly voluntary rollovers of existing Greek debt at maturity, which paves the way for Finance Ministers to complete the work on key outstanding issues by the end of summer,’ he added.

While addressing short term financing needs in some member states is a top priority, a fundamental overhaul of troubled economies is also necessary, the EC believes. But the nature of the Greek, Irish and Portuguese macroeconomic imbalances are highly country specific so the adjustment programmes need to address specific needs.
 
Buti also points out that although consolidation is underway, and the debt path is projected to begin declining by 2012, further efforts will be needed to address the debt challenge. ‘To achieve the 2012 public balance targets set out in the Stability Programmes, euro area member states will need to ensure full implementation of announced policy measures. Furthermore, beyond 2014, additional policy measures will be needed to address the costs of population ageing,’ he said.

‘The crisis has clearly highlighted the need for more thorough surveillance and coordination of member states' economic policies at the EU level. The comprehensive response to upgrade the EU's economic governance framework is a key element in this,’ he concluded.