By: Mike Campbell
The European Union is composed of 27 sovereign member states – in essence the EU is a sort of club. Like any club, the EU has its own rules which govern the conduct of its members; but when your membership is drawn from nation states, it is not always easy for the club secretary to get them to fall into line! In order to eliminate the (currently) 16 national currencies of the nations that decided to adopt the single European currency, some stringent rules had to be agreed such that the economies of the member countries were broadly aligned. This was imperative to invest the Euro with credibility as an international currency.
One of the rules for EU membership is that a country’s budget deficit is not allowed to exceed 3% of its Gross Domestic Product (GDP), but the global economic crisis has meant that most members have broken the rule. As Europe slowly starts to emerge from recession, the EU Commission has been reminding countries of this requirement and setting deadlines for compliance to be achieved. These periods range from 2012 up to 2014 and 13 of the EU’s members need to put their houses in order. The original deadlines were set in April, but since then the economies of France, the Irish Republic, Spain and the UK have deteriorated and these countries have been granted longer to sort themselves out. The French have already indicated that it is unlikely they will be able to meet the 3% target on schedule.
In order to get closer to balancing the books, the 13 nations will need to rein-in public spending; reducing expenditure on benefits and increasing tax revenues. This will not be easy against the backdrop of a tentative recovery, substantial unemployment (which is likely to worsen before it gets better) and shaky international confidence in financial institutions.