EU wants more government budget cuts

[January 12, 2011]  BRUSSELS (AP) -- European Union governments must make further cuts to their budgets, overhaul their pension systems, and make sure their banks are less volatile, the European Union said Monday as it set out the priorities for states' budgets for 2012.

The EU's executive Commission also said that countries with a large current-account surplus need to boost domestic demand -- a request likely to face strong opposition from Europe's economic powerhouse Germany, which says that its strong exports are the result of painful labor market reforms over the past decade.

The current account measures a country's balance of exports, imports and other capital flows. So far, reform pressures have focused on countries like Greece, Ireland and Portugal, whose big budget or current-account deficits have been blamed for turmoil on bond markets in recent months.

Wednesday's recommendations kick off the so-called European Semester that EU governments agreed to last year, which aims for closer coordination of state budgets. While the Commission won't have the power to veto a government's spending plan, it can give warnings and eventually sanction countries that break the EU's deficit caps.

The European Commission set out 10 key measures, which form the base for an assessment of states' budgets over the coming months. The recommendations, dubbed the Annual Growth Survey, are meant to prevent governments from building up the kind of deficits and vulnerable economies that triggered the current debt crisis, which has already required multibillion bailouts for Greece and Ireland.

"Without major changes in the way the European economy functions, Europe will stagnate and be condemned to a viscous circle of high unemployment, high debt and low growth," Monetary Affairs Commissioner Olli Rehn said in a speech.

In addition to further spending cuts, governments need to boost their competitiveness by giving more resources to the right sectors, Rehn said.

A new wave of stress tests, scheduled for February and March, should help accelerate the restructuring of banks, Rehn said. Massive bank bailouts are responsible for the high budget deficits in many states and continued uncertainty over banks' financial health is contributing to market jitters.

A previous round of bank stress tests failed to detect problems in several Irish banks, which later needed further capital injections. Analysts say that one reason for the tests failure was governments' reluctance to take the lid off their banks' potential problems.

As a next step, this spring EU governments will submit their near-term budgetary and economic strategies to the Commission, giving the EU's executive a chance to point out potential issues.

[Associated Press; By GABRIELE STEINHAUSER]

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