Well done, periphery, but keep up the good fiscal consolidation

The design, by the European Central Bank (ECB), of a conditioned sovereign debt purchase programme for those countries in the euro area that request assistance has managed to ease tension in the financial markets since September last year. This process has been helped by the advances made in the agenda of structural reforms and in the consolidation of fiscal imbalances in periphery countries.

In fact, the fiscal efforts being made in these countries are starting to see their first results. Undoubtedly, the case of Ireland stands out above the rest. The likelihood of its public deficit in 2012 falling to below 8% of gross domestic product (GDP), compared with the target of 8.6%, helped the Irish government issue its first long-term bonds since November 2010.

With regard to the other two bailed-out countries, Portugal and Greece, both the European Commission (EC) and the International Monetary Fund (IMF) endorse the progress being made over the last few months. It is estimated that the Portuguese public sector met its revised deficit target for 2012, namely 5.0% of GDP. For its part, in January the Greek government adopted the reforms agreed with international organisations which led to another payment of aid by the troika, namely 3.2 billion euros. Among the measures implemented, of note is the increase in the top income tax rate to 42% for those citizens with incomes over 42,000 euros. Another country that has presented significant advances is Spain, in this case by implementing its agenda of reforms for the banking sector. This has helped it secure approval from the Eurogroup to receive the second payment of aid to recapitalize its banks.

All this has been reflected in a notable improvement in the yield demanded for debt from the periphery countries over the last month. However, paraphrasing the Managing Director of the International Monetary Fund, Christine Lagarde, «there’s still a lot of work to be done». She’s not wrong. Correction of the fiscal imbalances in the periphery must be accompanied by further advances towards banking and fiscal union. This process was taken up again at the meetings of the Eurogroup and Ecofin at the end of January. Discussion centred on the role that must be played by the European Stability Mechanism (ESM) in those countries whose banking systems have solvency problems. Particularly important is the possibility of the bail-out mechanism itself being the one to directly recapitalize banks, without intervention by the public sector. Moreover, at these same meetings, eleven euro area countries agreed to push forward with the creation of a tax on financial operations.

All these processes, although slow, are gradually shaping Europe’s new institutional architecture. A desire that is reflected in the Franco-German initiative to foment competitiveness and growth of the euro area. But there are still numerous challenges: the elections in Italy and Germany in the months of February and October 2013 could set the scene for the euro area crisis.

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