European Commission responds to updated budget cut proposals from ailing Eastern European economies Hungary, Latvia, Lithuania, and Malta:
BRUSSELS (Dow Jones)–The European Commission on Wednesday said Hungary, Latvia, Lithuania and Malta are taking “effective action” to cut their budget deficits, but warned Hungary that its public finances face “considerable risks” this year.
Hungary likely hit its deficit target last year, with a shortfall worth 3.9% of gross domestic product, according to the commission, the European Union’s executive arm. But state revenue and spending are at risk this year and planned tax cuts next year could further hurt the country’s bid to bring its budget gap back below 3% of GDP by a 2011 deadline, the commission said.
Under EU rules, countries must keep their budget deficits below this 3% of GDP ceiling. Countries that break this limit face deadlines to correct their deficits and ultimately could face fines or the withholding of EU funds if they don’t comply. Among the EU’s 27 members, Bulgaria is the only country expected to have a budget deficit below 3% of GDP this year.
The commission has given countries some leeway during the economic downturn. On Wednesday it gave Lithuania and Malta an added year to bring their budget deficits to back under the 3%-of-GDP limit. The commission last spring had given Malta until the end of this year and told Lithuania to correct its deficit by the end of 2011.
These extensions were justified because both countries’ public finances were affected by a deeper-than-expected economic downturn last spring, the commission said in a statement.
The commission’s budget assessments come as the EU is struggling to strike the right balance between stimulus spending designed to aid an economic recovery and fiscal austerity enshrined in the bloc’s rulebook. The commission has been lenient with countries that have tried to keep their deficits in check and has recommended that broad deficit cuts should wait until 2011, when the economy is expected to be in better shape.
The commission has been less forgiving with Greece, which is expected to post a budget deficit close to 13% of GDP for 2009, making it the bloc’s worst offender.
The commission in November told Greece it had failed to take effective action to curb its budget deficit, triggering fears that the country might default on its debt or leave the euro zone. The commission on Wednesday said that in the coming weeks it will outline a timetable for Greece to bring its deficit back below 3% of GDP.
The Latvian and Lithuanian budget deficits last year were expected to be close to 10% of GDP, according to the commission. Even though both countries have deficits almost as large as Greece’s, the commission noted that they are taking steps to consolidate their public finances. Latvia is on track for an 8.5% of GDP deficit this year and Lithuania is pursuing “fiscal consolidation,” the commission said.
Malta’s budget deficit is expected to have reached 4.5% of GDP last year, according to the commission. It said the country should target a deficit worth 3.9% of GDP this year, using additional spending cuts or tax hikes, if needed.
The commission said that in the coming weeks it will publish assessments of budget-deficit cuts in Poland and Romania.
-By Adam Cohen, Dow Jones Newswires