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EU warns governments to do more to fight crisis

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BRUSSELS — The European Union fired a warning shot Wednesday, telling governments they need to do more if they want to finally rid themselves of the financial crisis and get their economies growing again.

The EU's executive Commission urged states to boost the existing €440 billion ($571 billion) bailout fund for countries that run into financial trouble, cut public spending, and roll back benefits to make their economies more competitive.

After debt market turmoil caused Greece and Ireland to require bailouts, Portugal is now being engulfed despite a successful bond sale. The fear is the crisis will spread to larger nations and cost Europe years of economic growth.

"In 2011, we need to get our act together. We need to break the vicious circle of unsustainable debt, disruption in the financial markets and low economic growth in some Member States," Commission President Jose Manuel Barroso said. "We face a simple choice: a decade of debt or a generation of growth."

In its recommendations for EU governments' 2012 budgets, the Commission also took to task economically strong states like Germany or the Netherlands, saying their current-account surpluses endanger the stability of the European economy by fueling asset bubbles and unbalancing growth.

The current account measures a country's balance of exports, imports and other capital flows. So far, reform pressures have focused on countries like Greece, Ireland and Portugal, whose big budget or current-account deficits have been blamed for turmoil on bond markets over the past year.

Wednesday's recommendations kick off the so-called European Semester that EU governments agreed to last year, which aims for closer coordination of state budgets. While the Commission won't have the power to veto a government's spending plan, it can give warnings and eventually sanction countries that break the EU's deficit caps.

However, the Commission took the opportunity to vent its frustration over governments' efforts to tackle Europe's crippling debt crisis, which has already pushed Greece and Ireland into seeking expensive bailouts.

Analysts say EU governments have acted too slowly to stop the crisis from spreading. Many expect Portugal — and possibly much larger Spain — to be the next victim of turmoil on government bond markets.

In their most vocal demand yet, Barroso and Monetary Affairs Commissioner Olli Rehn both said the existing bailout fund needed to be increased and "the scope of its activity widened." Discussions with the 17 eurozone governments on this are currently going on "and progress is being made," Rehn said.

Analysts fear the existing backstop might be too small if a big economy like Spain runs into financial trouble. However, Germany — the eurozone's largest economy and its bankroller — and several other countries have so far opposed boosting the size of the fund.

On Wednesday, German Chancellor Angela Merkel declined to comment on the Commission's proposals, but said her country would back whatever measures are needed to support the euro, "also regarding the shield," or fund. Merkel's spokesman, Steffen Seibert, said the decision to increase the size of the fund "is not pending at the moment."

Widening the scope of the fund's activities could mean giving it the power to buy government bonds on the open market — something the European Central Bank has so far done reluctantly and that many economists say would be better handled by the facility. Buying government bonds can help stabilize their prices and keep states' funding costs in check.

Acknowledging the opposition to increasing the fund, Barroso reminded eurozone governments of their commitment last year to do whatever necessary to safeguard the stability of the currency union.

"It makes sense that we give a strong signal, and not only signals but decisions, about the stability of the European economic area," Barroso said. He added EU leaders should be able to make a decision no later than at the next meeting of EU leaders on Feb. 4.

In its recommendations for 2012 budgets, the Commission championed a range of measures that are likely to face strong resistance from governments and labor unions.

To encourage companies to hire, the Commission suggested "targeted temporary reductions in employer social security contributions," increasing the retirement age and eliminating early-retirement schemes.

Similar measures in some countries have already triggered protests and strikes on a continent that values its strong social security net.

The Commission's attempt to target surplus countries is also set to face opposition. Germany, for instance, has long argued that its strong exports are the result of painful labor market reforms over the past decade and opposed including surpluses in a list of dangerous imbalances to watch on both an EU and global level.

But the Commission said bold steps were necessary, after the steep recession that engulfed the region following the collapse of Lehman Brothers wiped out about four years of economic growth.

"Without major changes in the way the European economy functions, Europe will stagnate and be condemned to a viscious circle of high unemployment, high debt, and low growth," Rehn said.

A new wave of stress tests, scheduled for February and March, should help accelerate the restructuring of banks, Rehn said. Massive bank bailouts are responsible for the high budget deficits in many states and continued uncertainty over banks' financial health is contributing to market jitters.

The Commission also said states' self-set targets for employment, poverty reduction, energy efficiency, and carbon dioxide emissions — all part of the EU's growth strategy — were not ambitious enough.


Geir Moulson in Berlin contributed to this report.