Saturday 7 January 2012

Euro crisis

Eurozone strains increase with grim new economic data
Italian bond rates and Spanish jobless numbers rise, while Belgium and four other countries face fines for size of deficits

6 January, 2012

Strains within the European Union intensified following another round of damaging data that showed a jump in the Spanish unemployment rate and a rise in the interest rate that Italy pays on its debt to unsustainable levels.

Spain's jobless rate jumped to almost 23% in November, when the rate for the European Union rose to 10.3%. Italian bond yields, which act as a proxy for interest rates, reached 7.19% on further worries about the state of the economy and the government's ability to pay its bills.

The grim economic news, which included a fall in retail sales across the eurozone and a surprise drop in German industrial production, sent leaders scurrying to agree further measures to shore up the euro.

Italy's prime minister, Mario Monti, met the French president, Nicolas Sarkozy, in Paris to discuss a pact between eurozone countries due to be signed in March, giving Brussels oversight on debt levels and allowing it to punish countries that breach the rules.

France said it was prepared to press ahead with a financial transaction tax, despite resistance from the UK and other EU members. Presidential adviser Henri Guaino said France would take a decision on the "Tobin tax" by the end of January to set an example for the rest of Europe.

François Baroin, the finance minister, said the aim was to have a tax in place this year, at least in France. "Decisions will be taken by the end of January as far as France is concerned," he told RMC radio. "France will take the lead on this issue. We will see how it can be applied."

The European commission, the EU's executive branch, is preparing the ground for greater fiscal union. It has already indicated it is prepared to get tough ahead of the deal, following publication of a list of five countries that face heavy fines for breaching current rules on budget deficits.

A spokesman said the commission had yet to reach a decision on what steps to take against Belgium, Cyprus, Hungary, Malta and Poland, which are all expected to have deficits in excess of EU limits this year, "but we will do it very soon". EU rules mandate that budget deficits must not exceed 3% of gross domestic product. Countries with deficits higher than that can be fined.

Meanwhile, Belgium's finance minister, Steven Vanackere, was locked in talks with the commission's high command on Friday night in an attempt to prevent EU officials imposing bigger public spending cuts. The commission has described Belgium's 2012 budget as too optimistic.

Belgium has promised to cut its budget deficit to 2.8% of economic output this year, from about 3.6% in 2011. But the commission believes it cannot meet this target unless tax revenues or spending cuts are increased.

The commission's criticism is a particularly sensitive issue in Belgium, where political parties took more than one and a half years to set up a government, which was finally sworn in last month.

Vanackere told the commission the government was determined to meet its fiscal targets this year. But Belgium has one of the highest debt loads in the eurozone, and analysts fear it risks being dragged into the currency union's debt crisis.
Under EU rules, Belgium must also spell out how it plans to reduce its debt to below 60% of GDP over the long term, from about 100% currently.

"It is normal that the commission is asking us questions," Vanackere told reporters outside the government offices. "The budget was set up at the end of the year at high speed. It was not the normal way to do things."

Belgium, Malta and Cyprus all face sanctions; the non-euro countries Hungary and Poland will escape financial penalties but could face tougher entry requirements should they join the euro.

The economic picture across Europe has worsened this week, with the exception of Germany, which enjoyed falling unemployment and strong business growth in December, and France, which also saw a rise in output at the end of 2011.

Retail sales for the bloc fell 0.8% in November, according to data from the EU statistics office, Eurostat. Economists polled by Reuters had forecast a monthly fall of just 0.2%.

The volume of sales fell more sharply in Germany, the eurozone's largest economy. Germany also suffered an 8% contraction in industrial production output, which analysts said was an indication of weakening export markets in the far east and China as well as the eurozone.

Eurostat said the bloc's unemployment rate of 10.3% in November was the same as October and up slightly from a year ago, when it was 10%. That compares with an unemployment rate of 8.5% in the US and 8.3% in the UK.

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