The Imbalances Procedure Reveals a Lot of Divergencies, But What's Common Is the Need for Reform
Adelina Marini, April 15, 2013
By publishing this year's in-depth reviews of the countries under the macro economic imbalances procedure, the European Commission again clearly says that the austerity policy is necessary and does not hamper a policy in support of economic growth. But the combination of the two seemingly contradicting policies is possible only if deep structural reforms take place. With the settling of the dust down from the first stages of the crisis and the forging of the new secondary legislation which upgraded the EU economic governance, the problems of the individual countries can now be seen more clearly. As the Commission notes in its 2013 review, the situation is different from country to country, but what is common is that they all need reforms that would reduce the pressure over public finances. In this regard, a very good illustration of this claim is Bulgaria for which the findings this year overlap almost entirely with the conclusions last year as a result of the complete lack of reforms.
The in-depth review under the procedure covers 13 countries no matter if they are from the eurozone or outside. Only the countries that are with special programmes (but also regardless whether they are euro members or not) are not included in this review because their situation is assessed every three months. The conclusions of the review are that in many countries there are corrections of the imbalances, but some of them continue to be vulnerable mostly due to external debt. The problem with competitiveness also continues to be a factor which distorts the economic balance in a number of states. The housing markets are in a process of adjustment in many countries that suffered pre-crisis property booms (Bulgaria among them). The Commission warns that a further adjustment of the housing market should not be excluded because of the vulnerable banking sector, tightened credit conditions and the economic uncertainty.
Spain should continue paying for its cheap growth from the past
Spain and Slovenia are the countries of all 13 for which the Commission warns they reveal excessive macro economic imbalances. For Spain, the analysis points out that in spite of the invested so far efforts, more reforms will be needed. The biggest sources of concern are the high external and domestic debt. And although the measures already undertaken at the EU level and by the government of Mariano Rajoy deliver, the developments in the past year reveal the country's vulnerability. In the past year, unemployment which was the highest (according to the latest data, the country has been outrun with several percentage points by Greece) in the EU, has continued to grow, the economic activity was shrinking and the need of public money to recapitalise some banks contributed to additional deterioration of the economic environment.
According to the Commission analysis, Spain's problems are due mainly to the piling up of huge net external liabilities as a result of the capital flows during the economic boom. After the bubble went bust, the banking sector ended up with many doubtful real estate and bad loans. The risks were to a large extent subdued through the special programme that was agreed at EU level. Another problem is private sector indebtedness. Spain has to continue the reforms, especially in the area of the market of goods and services, as well as the labour market, the financial sector and public finances. The big question lately is whether Spain will get another two years extension to put its budget deficit in order - a compromise that was made last year and was met quite with hostility by other member states.
For now, the Commission is refusing to answer, as vice President Olli Rehn points out that a deep and comprehensive analysis is yet to be made which will assess what can be done in support of the Spain's efforts to balance its economy. After suffering severe criticism by renown economists and the member states, the Commission dropped off the one-size-fits-all model and undertook a country-specific approach. Spain was the first to be made a compromise with.
Slovenia - a victim of state ownership and corruption
The small former Yugoslav republic is the second country for which the Commission warns that it demonstrates excessive macro economic imbalances. According to the in-depth review by the Commission, imbalances are piling up very rapidly and this is why urgent actions are needed to prevent their unwinding. The Alp state is a very interesting case because it, unlike many other euro- and non-euro countries, does not suffer from excessive both private and public debt - both are under the alert thresholds, the external debt is also relatively under control. In 2012, Slovenia registered a debt to GDP ratio of almost 54%. In its winter forecast, the Commission expects this year the debt to increase to 63.5 per cent of GDP. Unemployment in the country is also not very high and is expected to remain below 10% this year. Nonetheless, the financial sector stability is endangered and there has been a talk for a year that the country needs a bailout.
The main problems stem from high corporate indebtedness and its interconnectedness with the budget. The reason lies in the very economic structure of the country dominated by state ownership. Separately, Slovenia continues to fight the legacy of the previous economic booms. Firms are still over-indebted and still rely on bank funding.
The conclusion of the Commission is that the economic imbalances in Slovenia are still manageable, but it is necessary the government to act decisively and quickly by completing the necessary reforms. But will it be able to is a question which more and more remains without an answer. Last week, Slovene Prime Minister Alenka Bratusek was in Brussels to meet with European Commission President Jose Manuel Barroso. After the meeting, she firmly stated that Slovenia did not have any intention to ask for a bailout and could handle the crisis on its own. She admitted that the country's biggest problem was the banking sector, but that by June a "bad" bank would be established to absorb the "bad" assets. Among the other measures Bratusek's government (left wing) intends to undertake and for which it claims broad support is secured, are reforms of the pension system and the labour market.
In support of these measures are also the efforts to consolidate the budget. Last but not least are the plans for privatisation. Ms Bratusek said that by the summer the first tenders will be announced. She made a sharp appeal Slovenia's situation not to be assessed on the basis of speculations. Slovenia is not a tax haven, unemployment is lower than the average, the debt is below the EU average and in general it is more stable than many other European countries. Evaluate Slovenia on the basis of facts and figures, she urged. Barroso's message, however, was that whatever the government were to undertake they had to ensure the broadest possible support. According to him, Slovenia was facing a really difficult task to ensure national consensus for reforms. The deepest crisis requires the deepest reforms, he said and pointed out that patience and determination were needed.
And if Ms Bratusek's messages sounded convincingly in Brussels, not such a message she conveyed during an interview with the CNN, which was an occasion for sharp criticism in Slovene media. During the four-minute long interview with Richard Quest's economic programme, the prime minister of Slovenia demonstrated a scarce fluency in English and weak preparedness. In response to Richard Quest's numerous attempts to extract an assurance that Slovenia will not repeat the fate of the other programme countries and that it is not Cyprus, Ms Bratusek repeated one and the same thing - Slovenia is determined to manage on its own. She often consulted with discreetly hidden notes, which revealed her lack of determination and low preparedness.
But what is beyond economic problems, cannot be found in the European Commission in-depth review and cannot be seen with a bare eye. A testimony, however, were the large scale protests in the country which were not only aimed at the fall of Janez Jansa's government, but also called for a comprehensive reform of the political system. One of the most circulating dailies in Slovenia, Delo, even created a special web page "Revolt for a Better Tomorrow", where it collects the readers' opinions about what can be changed. Some of the opinions are surprisingly detailed and call for the broadest possible opening of the government.
According to Professor Matevs Tomsic, a political sociologist, several are the factors that had led to the crisis in Slovenia. One is the general economic and social crisis which had deeply affected the Slovene economy and society. The second reason are the traditionally strong ideological conflicts that grew in the past years. And thirdly, the problematic relations between key political players. In an interview with euinside, he said it was possible to say that something in the transition to independent market economy and independence from former Yugoslavia went wrong. Slovenia chose in the beginning of the transition a process called "gradualism", characterised by slow change and piecemeal reforms with the strong role of the government in the governance of the economy and the other subsystems.
This model, Professor Tomsic says, brought some positive effects initially, but at a later stage it revealed its main flaws: monopolies, over regulation, clientelism, politicisation. As a result, there is the Slovene version of "crony capitalism". The problem is additionally complicated by the fact that people do not trust the political system.
All this makes the efforts of Alenka Bratusek's government, who has parliamentary support, but practically she was not elected by the people to govern, even harder.
France and Italy have set the alarm
And although they are not in the group of Slovenia and Spain (with excessive imbalances), France and Italy have caused the biggest concern after the publication of the Commission in-depth review on April 10. The French economy is practically ran aground - excessively large public debt, deterioration of the trade balance and the competitiveness. The problems of the French economy have been a cause of concern for quite some time already, especially in neighbouring Germany, but the socialist president, Francois Hollande, is constantly trying to soften the reality. The Commission message, however, is that more efforts are needed to avoid the risk of unfavourable unwinding of the situation because France is of great importance for the euro area mainly due to the size of its economy.
The biggest imbalances are the growing trade deficit which reflects the continuous loss of export markets for years, associated with the loss of competitiveness. The wages grow quickly and exert further pressure over costs and corporate profitability. The low and declining profitability of private companies, especially in the production sector, not only did not improve their high indebtedness, but also hamper their possibilities to innovate and enhance their competitiveness. The labour market is also deteriorating thanks to the high unit labour costs.
In Italy, the problems are similar, adding also high costs of servicing the excessively large public debt. The tax burden in Italy is also very high, which exerts pressure on Italian banks and therefore on the private sector. Taxes are especially high on labour and capital, there are many institutional and regulatory barriers, too. The business environment is hostile. All this limits the flow of foreign direct investment.
The Commission analysis has purely consultative value, but Vice President Olli Rehn pointed out that it would be lovely if the member states take into account this review and include it in their national reforms programmes, which they will present this spring for approval.