The European Commission took Germany, France, Italy, Spain, and the United Kingdom out back to the woodshed for a financial thrashing yesterday, March 17. Now let’s see if the bond market was paying attention.
The bureaucrats in Brussels essentially called the budgetary bluffs of the biggest countries in the European Union. From Germany to Italy official government promises to get budget deficits back under 3%–the target for union members—are based on fiction.
Take Spain, for example. The government has promised to cut its current budget deficit of 11.4% of GDP for 2010 to 3% by 2013. (Just remember that European Union basket case Greece set off the current euro crisis when it suddenly “discovered” that its 2009 budget deficit would be 12.7% of GDP.)
No way, Jose Luis Rodriguez Zapatero, the European Commission said. The plan is based on predictions that the Spanish economy will grow by 1.8% in 2011, 2.9% in 2012, and 3.1% in 2013. Pretty heady growth when Spain’s economy is expected to shrink by 0.3% in 2010 and the country faces huge competitive problems in global markets as a result of growth in wages that exceeded growth in productivity.
The European Central Bank forecasts European Union growth at 0.4% to 1.2% in 2010 and at 1.5% for 2011. The OECD (Organization for Economic Cooperation and Development) projects European Union growth at 0.9% in 2010 and 1.7% in 2011.
You’d expect the commission to criticize deficit reduction plans for Italy and the United Kingdom, but Brussels didn’t stop with the usual suspects.
Germany and France, both projected to run budget deficits well above the 3% target this year, have also produced deficit reduction plans based economic fictions.
France, for example, is forecasting annual growth of 2.5% in 2011-2013. And Germany came in for a special mention because the government has not yet explained how it can deliver a shrinking deficit at the same times as it enacts tax cuts.
The French and German economies, the strongest in Europe are projected to grow by 1.4% in 2010. Budget deficits are forecast at 8.2% of GDP for France and 5.5% for Germany.
As the European Commission so drolly put it in comments about the French plan, “The strategy does not leave any safety margin if economic developments turn out worse than projected.”
Who says bureaucrats don’t have a sense of humor?