EU commissioner warns on reform

The European Union’s commissioner for economic monetary affairs has warned there must be “no back-sliding” from EU-member states as they repair their national balance sheets

Writing in the Financial Times ahead of the European Commission’s Annual Growth Survey, Olli Rehn said Europe’s most pressing problem was to “break the vicious circle of unsustainable debt, financial turbulence and sub-optimal growth.”

Each member state must “put its own fiscal house in order” by adjusting its budget, repairing its finances and implementing structural reforms to spur growth, he wrote.

He admonished EU nations for “insufficient ambition and a lack of urgency” to reform taxes, labour markets, pensions and regulation.

However, he praised Greece for “a remarkable commitment to economic stabilization”, Spain for restructuring its savings banks and pension and labour reforms, and Portugal for a “rigorous budget” for 2011.

He wrote 2011 would “undoubtedly be challenging”, but could also be when Europe overcomes its sovereign debt crisis.

However, European bond fund managers are sceptical, and most expect Portugal and possibly Spain ultimately to request central aid.

Belgium has been widely mentioned as a country debt markets would then target.
Peter Geikie-Cobb, co-manager of Thames River Capital’s Global Bond fund, said: “Belgium has always had a pretty high net debt to GDP ratio. Its starting point is rather like Italy’s, although Italy is probably not in such a dreadful state because most of its debt is domestically owned.”

Belgium’s debt to GDP ratio is among the eurozone’s highest excluding the periphery, and inconclusive elections last June unnerved markets.

Simon Thorp, head of fixed income at Liontrust, said Belgium was “not an easy target” for bond markets, but it must repair its banks, “which are effectively bust”.

Geikie-Cobb said: “The eurozone’s banking systems are so integrated, if there is a major bank crisis in Europe, no one country has a financial system that can bear the burden of other countries’ banks imploding.”

The “veneer was brushed away” from Spain’s banks as their exposure to troubled commercial and residential property has become visible to investors, Thorp said.

Geikie-Cobb noted Germany’s banks are so entwined with Spain that Berlin would have to try to bail out Madrid if it faltered, but that this would land Europe “in deep trouble”.

Jim O’Neill, chairman of Goldman Sachs Asset Management, said the key question now for the Eurozone is how long Germany will continue propping it up.

David Walker

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