Imbalances: Spain and Cyprus warned over weak banks
By Sarah Collins | Wednesday 30 May 2012
The European Commission has singled out Spain and Cyprus for particular attention under its macroeconomic surveillance system, saying, on 30 May, that they are suffering from “serious imbalances not least in their financial sectors, which need to be addressed as a matter of urgency”. Spain is currently battling against the erosion of bank balance sheets as a result of the property crash, while Cypriot banks suffered major losses under a scheme to haircut Greek bondholders that formed part of that country’s second bailout earlier this year.
The two countries were named in February as part of a list of 12 countries being singled out for further study. The Commission has said that none of the 12 are suffering from imbalances serious enough to warrant being placed under extra surveillance, which could eventually lead to fines of up to 0.1% of GDP if governments fail to enact appropriate structural economic reforms. “Europe is undergoing a difficult but necessary rebalancing of its external economic imbalances, and internal,” Economic Affairs Commissioner Olli Rehn said after presenting reports on the 12 countries, as well as country-specific recommendations for all 27 EU members based on their own national economic and budget plans.
The other ten countries in the list - Belgium, Bulgaria, Denmark, Finland, France, Hungary, Italy, Slovenia, Sweden and the UK - should also correct their economic problems. Belgium, the report said, has high public debt levels, Bulgaria needs to watch corporate sector deleveraging, Denmark should monitor rising household debt, France should improve its export performance and competitiveness, Italy should watch high public indebtedness and raise exports, Hungary’s economy is bending under the weight of foreign currency-denominated debt, Slovenia should look at corporate sector deleveraging and banking stability, Finland should improve competitiveness, while Sweden and the UK should check private sector debt and the housing market.
“The medicine is beginning to work - public finances are starting to improve, imbalances are beginning to be addressed,” Commission President José Manuel Barroso said. “We are not there yet in terms of our goals - we now need to redouble our efforts at both national and European levels,” he said. “We need to move further and faster.”
Member states will have to take account of the recommendations when drawing up their budgets and economic plans for next year. The next report on imbalances should be published next February. Meanwhile, the Commission will present in the autumn a study on “the drivers and policy implications of large and sustained current account surpluses,” looking at stronger economies.
The excessive imbalances procedure is the counterpart to the EU’s excessive deficit procedure, part of the Stability and Growth Pact, which asks states to keep deficits below 3% of GDP or face immediate fines.