EU raises flag over French, Italian, Spanish economies

Wed Apr 10, 2013 10:25am EDT
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By Jan Strupczewski and Martin Santa

BRUSSELS (Reuters) - The European Commission warned of deepening economic problems in France, Italy and Spain on Wednesday, and said Slovenia must take urgent steps to offset the risk of a wider destabilization across the euro zone.

Unveiling its second review of economic imbalances in 13 European Union countries, the Commission flagged concerns about France and Italy, while including Spain and Slovenia among countries that could face fines if they do not correct course.

The early warning system was set up after problems in Greece, Ireland and Portugal triggered the euro zone sovereign debt crisis and forced the bailing out of four member states.

"(In) Spain and Slovenia, imbalances can be considered excessive," said the Commission, mentioning problems with high deficits and public debt levels, imbalances in the banking system and in labor market structure and costs.

In Spain, which had to borrow 40 billion euros from the euro zone last year to recapitalize its shattered banks, it said very high domestic and external debt levels posed serious risks for growth and financial stability.

"Although adjustment is taking place, the magnitude of the necessary correction requires continuous strong policy action," the Commission said. Under the macroeconomic imbalances procedure, a country that does not take steps to remedy excessive imbalances can be fined 0.1 percent of GDP by the EU.

Perhaps more concerning are growing signs of imbalance in France and Italy, the euro zone's second and third largest economies, even if they are not yet deemed "excessive".

If those problems were to worsen, it would signify that almost no EU economy, save perhaps Germany, is immune from the impact of the debt crisis, and borrowing costs across the region would be likely to rise in reflection of that risk.   Continued...

European Economic and Monetary Affairs Commissioner Olli Rehn speaks during a news conference at the EU Commission headquarters in Brussels April 10, 2013. REUTERS/Francois Lenoir