EU warns of imbalances in Spain, Slovenia

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Associated Press

Posted on April 10, 2013 at 2:01 PM

BRUSSELS (AP) — The European Commission turned up the heat on Spain and Slovenia Wednesday, warning that the two struggling countries are facing "excessive" problems fixing their economies. Meanwhile, France's government came under pressure to get its debt under control.

In its health-check of European Union countries with debt and deficit problems, the Commission singled out Spain and Slovenia as countries where swift action was needed. Both countries have been hit by recession, high unemployment and ailing financial sectors.

The Commission's report recommended that the two countries must both move swiftly to fix their ailing banking sectors — either through recapitalizing or winding down some banks — and further reform their economies to ensure a path toward sustainable growth.

As well as being the EU's executive branch in Brussels, the Commission is also the 27-country bloc's economic watchdog, with the power to identify and pressure countries with vulnerable economies into taking action.

Unveiling the Commission's finding, Olli Rehn, the EU's top economic official, said that Spain must maintain the reform momentum since country faces "formidable challenges."

The report added that "high domestic and external debt levels continue to pose serious risks for growth and financial stability" in Spain.

Spain, the EU's fifth-largest economy with a 1.04 trillion euro annual gross domestic product, is in its 18th month of recession with an unemployment rate of more than 26 percent. The country's problems stem from its banking industry, which has been struggling under toxic property loans and assets since Spain's property bubble collapsed in 2008.

Spain has already received 40 billion euros in loans from the European Union for its financial sector on the condition that it overhaul its banking sector. The country's government has also embarked on a program of harsh austerity measures to bring its deficit down from almost 7 percent of annual GDP, way above the EU target of 3 percent.

The Commission also warned that Slovenia, whose economy is about 29 times smaller than Spain's, faces a "substantial" risk from high corporate debt, bad loans and deteriorating public finances.

Markets have started worrying about Slovenia because of the nation's shaky banks, also reeling from a burst real estate bubble and unpaid property loans. While its overall public debt load of 48 percent of its GDP is below the EU average of 85 percent, the country of 2 million is already facing difficulties refinancing its debt, with its borrowing costs increasing steadily over the past months.

That has fueled fears it could soon find itself unable to afford to raise money on the international bond markets and become the sixth country among the 17 EU countries that use the euro — after Greece, Portugal, Ireland, Spain and Greece — to seek a rescue loan package.

The Commission identified 11 other countries in its report with deficit and debt problems, but said their problems were not as bad as Spain and Slovenia's. The countries were: Belgium, Bulgaria, Denmark, France, Italy, Hungary, Malta, the Netherlands, Finland, Sweden and the United Kingdom.

However, Rehn did warn that France, the second-largest economy in the EU, must strengthen its reform effort to regain competitiveness, and show "decisive action" to tackle its growing debt burden.

"There are too main challenges for France: the deterioration of its exports performance ... and the elevated level of public debt," he said.

The "high and increasing" debt burden is weakening France's position to react to any adverse shocks, thereby endangering the domestic economy and even the eurozone as a whole, it warned.

"France's public sector indebtedness represents a vulnerability, not only for the country itself but also for the euro area as a whole," the report said.

France's debt is set to exceed 93 percent of its GDP by the end of this year, the Commission said.

With the French economy in recession and persistently high unemployment, the government in Paris is struggling to get the budget deficit under control and is set to miss this year's target of 3 percent of GDP.

The EU will decide in May whether to grant France an additional year to meet the target or to launch a procedure that could lead to economic sanctions.

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