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Or at least the end of the perceived strength of the Euro. Portugal expects to announce a deficit of some 6 to 7% of its economy, a huge amount over the figure forecast by the IMF just a month ago. Why such a big surprise? It's like the Greece Olympic budget shenanigans. But how can Germany and France complain when they were first in line to gut the growth and stability pact?
I can see why the UK and some other European countries hesitate to join the Eurozone.
I can see why the UK and some other European countries hesitate to join the Eurozone.
Rising deficits in Portugal and Italy rattle eurozone
By Peter Wise in Lisbon, Adrian Michaels in Milan and George Parker in Brussels
Published: May 17 2005 18:40 | Last updated: May 17 2005 18:40
GraphicThe 12-country eurozone was hit on Tuesday by revelations that the economic situation in two of its weakest members, Italy and Portugal, could be even worse than feared.
Domenico Siniscalco, Italy's finance minister, was forced to downgrade his country's growth forecasts for the second time in a month, warning that the economy might not grow at all.
Meanwhile, in Portugal it emerged on Tuesday that the centre-left government was pursuing policies that could take four years to bring the country's budget deficit below the European Union's limit of 3 per cent of GDP. Growing divergences in the eurozone were described last weekend as “seriously worrying” by Jean-Claude Juncker, the Luxembourg chairman of the eurogroup, and they are causing concern at the European Central Bank.
The rising deficits in Italy and Portugal present an early test for the 12-country club over its willingness to apply budget discipline, amid fears that the March decision to relax the EU's stability and growth pact is already leading to fiscal loosening.
Joaquin Almunia, EU monetary affairs commissioner, is determined to put pressure on both countries to cut their deficits and reform their economies, by proposing action under the pact next month. “The pact is still alive,” Mr Almunia told the FT last week.
Mr Siniscalco said yesterday that the Italian government would lower this year's growth forecast again after the country's plunge into recession in the first quarter.
The economic gloom contrasted with the arrival finally of some good news for the government of Silvio Berlusconi, as the centre-right coalition fared unexpectedly well in local elections in Sicily.
Mr Siniscalco told politicians on Tuesday that Italian growth could be 0.6 per cent. Only last month he was forced to downgrade the forecast from 2.1 per cent to 1.2 per cent.
He added: “If growth were zero, the deficit would be 4 per cent. I don't know if growth will be zero or 0.6 per cent, it's too early to tell.”
Portugal's centre-left government, which took office in April, is bracing itself for a strongly adverse reaction from international financial markets and the European Commission when a special commission reports new figures for the budget deficit next week.
Government officials expect the commission headed by Vitor Constâncio, governor of the central bank, to report a deficit between 6 and 7 per cent of gross domestic product.
In an effort to offset the impact of the report, the government is preparing sweeping measures to combat its budgetary crisis, which it fears could undermine the country's international credibility and incur disciplinary action by the Commission.
The worsening outlook in the two countries will rekindle the debate about whether they should have joined the single currency in 1999.
Germany had strong doubts during the 1990s about whether the economies of the “Club Med” countries were ready. As part of the currency union, they are denied the traditional escape routes from economic trouble: devaluation or cuts in interest rates.
With their deficits already above the EU's 3 per cent limit, neither government has scope to cut taxes or raise public spending.
“They necessarily face a slow and painful economic reform process,” said Jean Pisani-Ferry, director of Bruegel, the Brussels-based economic think-tank.
By Peter Wise in Lisbon, Adrian Michaels in Milan and George Parker in Brussels
Published: May 17 2005 18:40 | Last updated: May 17 2005 18:40
GraphicThe 12-country eurozone was hit on Tuesday by revelations that the economic situation in two of its weakest members, Italy and Portugal, could be even worse than feared.
Domenico Siniscalco, Italy's finance minister, was forced to downgrade his country's growth forecasts for the second time in a month, warning that the economy might not grow at all.
Meanwhile, in Portugal it emerged on Tuesday that the centre-left government was pursuing policies that could take four years to bring the country's budget deficit below the European Union's limit of 3 per cent of GDP. Growing divergences in the eurozone were described last weekend as “seriously worrying” by Jean-Claude Juncker, the Luxembourg chairman of the eurogroup, and they are causing concern at the European Central Bank.
The rising deficits in Italy and Portugal present an early test for the 12-country club over its willingness to apply budget discipline, amid fears that the March decision to relax the EU's stability and growth pact is already leading to fiscal loosening.
Joaquin Almunia, EU monetary affairs commissioner, is determined to put pressure on both countries to cut their deficits and reform their economies, by proposing action under the pact next month. “The pact is still alive,” Mr Almunia told the FT last week.
Mr Siniscalco said yesterday that the Italian government would lower this year's growth forecast again after the country's plunge into recession in the first quarter.
The economic gloom contrasted with the arrival finally of some good news for the government of Silvio Berlusconi, as the centre-right coalition fared unexpectedly well in local elections in Sicily.
Mr Siniscalco told politicians on Tuesday that Italian growth could be 0.6 per cent. Only last month he was forced to downgrade the forecast from 2.1 per cent to 1.2 per cent.
He added: “If growth were zero, the deficit would be 4 per cent. I don't know if growth will be zero or 0.6 per cent, it's too early to tell.”
Portugal's centre-left government, which took office in April, is bracing itself for a strongly adverse reaction from international financial markets and the European Commission when a special commission reports new figures for the budget deficit next week.
Government officials expect the commission headed by Vitor Constâncio, governor of the central bank, to report a deficit between 6 and 7 per cent of gross domestic product.
In an effort to offset the impact of the report, the government is preparing sweeping measures to combat its budgetary crisis, which it fears could undermine the country's international credibility and incur disciplinary action by the Commission.
The worsening outlook in the two countries will rekindle the debate about whether they should have joined the single currency in 1999.
Germany had strong doubts during the 1990s about whether the economies of the “Club Med” countries were ready. As part of the currency union, they are denied the traditional escape routes from economic trouble: devaluation or cuts in interest rates.
With their deficits already above the EU's 3 per cent limit, neither government has scope to cut taxes or raise public spending.
“They necessarily face a slow and painful economic reform process,” said Jean Pisani-Ferry, director of Bruegel, the Brussels-based economic think-tank.
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