Single Market 2.0: EU Focuses on Completing Single Market for Economic Recovery

Centre for European Studies
ECONOMIC RECOVERY WATCH

CONTENTS

WATCHTOWER

EU MEMBER STATES

WORLDWIDE

INSTITUTIONS

EPP VIEWS

OUR COMPETITORS' VIEWS

FROM THE BLOGOSPHERE…

ANNEX

www.thinkingeurope.eu


‘Watchtower’
Single Market 2.0: The Next Big Thing
Foreword by CES Head of Research

When former European Commissioner Mario Monti presented his report on completing the Single Market on
9 May 2010, Europe’s attention was focused elsewhere: heads of government were focused on the euro bailout.
What followed was the now familiar confrontation between German insistence on toughening up the Growth
and Stability Pact and French insistence on a true gouvernement économique with real competences in macro-
economic coordination. Almost three months later, it should be clear to any sober analyst that neither of these
two approaches will find the full consensus of the Member States. Meanwhile, the European Commission is
determined to make the completion of the Single Market one of its flagship projects for the upcoming years.

One of the eternal truths of the European Union is that the Single Market is incomplete. Not only in services,
which is the most prominent example, but also national regulations (allowed through treaty exceptions) still
inhibit the basic freedoms proclaimed in the Treaties. The potential advantages of removing the last exceptions
are impressive: according to The Economist, completing the Single Market just in the digital economy, by
harmonising patents and removing other obstacles, might increase EU GDP by 4%. In the deepest economic crisis
of its history, with staggering debt, weak growth and sagging global competitiveness, the EU would be suicidally
stupid to forgo the growth options contained in the completion of this essential tool of the integration process.

But here is the snag: it was already difficult enough to achieve what we have now, for instance in the service
sector. The 2006 compromise on the Services Directive took years of hard negotiating. It is no coincidence that it
is better known in France as the Bolkestein initiative (with a clear connotation of Frankenstein). And that was in
times when the EU economy looked good. So how easy will it be now to confront the vested interests of trade
unions, corporate oligopolists and other 20th century nostalgics, especially in continental Western Europe - in
the crisis, facing the possibility of a double dip, with unemployment already disastrously high in some Member
States and looming in others? And that includes Germany, to be fair, where the Monti report has collected some
official applause although we all know perfectly well that some German lobbies were among the most visceral
enemies of Fred Bolkestein’s approach on services.

Hence, the obstacles to a Single Market 2.0 are formidable. And yet, it is worth trying. Because it is and
remains true that in view of its global competitiveness as well its debt and demographic future, Europe needs to
mobilise as much growth potential as possible. Maybe precisely in the digital economy, the obstacles are not as
high as in other sectors. But even on services, we can’t afford not to try harder. Besides, some polls indicate that
voters may be unexpectedly open to more flexible markets, precisely because the crisis seems to have created
an atmosphere in which many are willing to work harder for less. Last but not least, the EU badly needs a
project. With the euro crisis, the Lisbon hangover and enlargement fatigue casting long shadows over our fragile
European souls, we need a new strategic goal. And even if Jacques Delors was right when he quipped that one
does not fall in love with a Single Market, I would venture to say that at this point in time, love is not the issue.
This is not about love but about fear and hope: the fear of irreversible decline versus the hope of sustainable
recovery. It’s up to our leading politicians to spread this message, with courage and determination.



15/07/2010 To view full articles click on hyperlinks.

EU Member States
Austria
Social Democratic (SPÖ) Labour Minister Rudolf Hundstorfer reported signs of recovery on the job
front: the minister announced that new figures showed that the number of unemployed people
declined by 7.3 per cent last month compared to June 2009, to 212,753. However, the figure does not
consider the more than 284,000 jobless Austrians sitting controversial re-education courses provided
by the Labour Market Services (AMS). In other news, People’s Party (ÖVP) Vice Chancellor Josef Pröll
has appealed to European Union leaders to introduce a continental tax on financial transactions by
next year. Meanwhile, the European Commission has given the green light for an extension of the
Austrian bank assistance package for another six months. The agreement to subsidise the banks was
set to expire at the end of July. However, coupled with the state aid extension, the European
Commission also announced that two Austrian banks will be among the 91 institutes undergoing a
stress test by a European financial market watchdog later this month. The Committee of European
Banking Supervisors (CEBS) officials said they will examine the state of Erste Group and Raiffeisen
Zentralbank (RZB) as well as Bank Austria’s (BA) Italian owner UniCredit. This goes against Austrian
National Bank (OeNB) Governor Ewald Nowotny declarations earlier this year that he would not reveal
precise findings of the affected Austrian institutes. Nowotny caused some controversy by labelling the
stress test scheme a ‘temporary fashion trend coming from the United States’ last month. In terms of
their foreign activities, Austrian banks are considering abandoning some of their subsidiaries in
Hungary as the government there reveals plans to introduce a bank tax.

Belgium
The European Council Presidency holder has intervened in a row over European financial watchdogs
in an attempt to avert a breakdown in talks to set up the supervisors by the start of next year. The
country's finance minister Didier Reynders contacted his German, British and French counterparts
asking them to back a compromise and end an impasse that threatens to derail plans for the
watchdogs. The Belgians are asking countries such as Germany and Britain to agree to give the new EU
regulators the final say over Berlin and London. At the heart of the disagreement is whether the
watchdogs get powers to overrule individual Member States. Meanwhile, Belgium's central bank
raised its forecasts for economic growth and inflation this year, but said debt-to-GDP would top 100
per cent. The economy will grow by 1.3 per cent this year, slightly more than previously forecast, and
by 1.7 per cent in 2011 after contracting by 3.0 per cent in 2009, Central Bank Governor Guy Quaden
said. Belgium's public sector deficit was forecast at 5.0 per cent this year, revised from 5.4 percent.
The bank also raised its 2010 inflation forecast to 2.0 per cent. Inflation in Belgium peaked at 5.9
percent in July 2008, but has fallen sharply since then.

Bulgaria
Right-wing leader Martin Dimitrov says that Bulgaria will face drastic fiscal demands if it decides to
seek aid from the International Monetary Fund. This move would be a result of the government's
failure to cut state spending. The Ministry of Finance has issued a special statement clarifying that it



was not involved in loan negotiations. The Bulgarian government projected a 3 per cent GDP increase
according to the 2011 Budget Act. There will be no increase in taxes or cuts in salaries and pensions.
The planned budget deficit will reach 2.7 per cent of GDP. The country’s Finance Minister Simeon
Djankov foresees that the unemployment rate will be below 11.4 per cent at the end of 2011. The
Bulgarian parliament has recently approved the 2010 State Budget Revision Act with 1 per cent GDP
growth in 2010 and a deficit of 3.8 per cent under the EU accounting rules. According to the original
2010 budget, the deficit was planned at 1.9 per cent.

Cyprus
A wave of good news and expressions of careful optimism concerning the Cypriot economy was
followed by the shock announcement on 13 July that Cyprus would be put under excessive-deficit
surveillance by ECOFIN. At the end of June the Finance Minister expressed his hope that the
government’s plan, combining public sector cuts and tax increases, would manage to put public
finances in order. In early July, trade unions accepted zero increases in public servants pay but only
under the condition that the government enacts measures that will increase revenue as well.
Unemployment kept rising, but Cyprus received good comments by credit-rating agencies and the
IMF alike. According to the finance minister, this made it likely that the Cypriot economy will maintain
the pace of the minor recovery, and that it could grow even more in 2011. It could allow Cyprus to
slowly withdraw the 400 million euro emergency package. Public deficit also shrank during 2010. On 5
July the IMF said that Cyprus will return to modest growth in 2011, but that more action was needed
to attain the goal of a 3 per cent public deficit by 2013. However, the centre-left government failed to
pass five bills through the parliament that would increase state revenue significantly: two tax bills (on
corporate and property tax) and three bills on tax evasion, public expenditure and urban planning.
Now the government will try to curb spending through ‘aggressive’ salary cuts. In the meantime
Cyprus will be subject to the new surveillance mechanisms of the EU, while the economic crisis seems
to turn also into a political crisis for the island-state.

CzechcRepublic
A new Czech centre-right government made up of the Civic Democrats, TOP 09 and Public Affairs has
just been sworn in, after a month and a half of coalition talks. The new government had pledged to
carry out fundamental reforms and fight corruption. Already on 7 July, negotiating teams for the three
parties closed the final chapters of their coalition agreement paving the way for reforms aimed at
improving public finances. The incoming centre-right cabinet agreed that the 2011 state budget deficit
would not exceed 140 billion crowns and that the overall deficit would not be more than 4.6 per cent
of GDP. It has an ambitious goal to lower the budget deficit to less than 3 per cent of GDP by 2012
and to have a balanced budget by 2016. It wants to begin by saving around two billion euros next year.
Ministers will be faced with the choice of cutting salaries in state sector by 10 per cent or laying off
staff. That will be felt immediately in the armed forces. The smallest party in the coalition – Public
Affairs – demanded that 80 million euros be moved from defence spending to education. The
government plans to increase the lower band of VAT from January 2011, from 10 per cent to 11 or 12
per cent. Czech university students will also start paying tuition fees, of up to 780 euros per year. The
good news is that salaries for teachers will rise to 780 euros. Doctors who invest in their qualifications
will be rewarded financially. People earning over 2,800 euros gross per month will pay lower



compulsory state pension contributions to make the system fairer, seeing as the state cannot afford to
pay them higher pensions. A strategic, long-term goal of Necas´s cabinet is a pension reform based on
private pension schemes along with the solidarity public pension insurance.

Denmark
The troubled Amagerbanken is staggering after an announcement that its main shareholder, Karsten
Ree, will stop efforts to save the troubled financial institution. The Financial Stability Company, which
was set up by the state and the finance industry in 2008 to avert the worst affects of the financial
crisis, has given Amagerbanken until 22 July to raise 750 million kroner, but with billionaire Ree’s
statement it is uncertain whether the bank will be able to raise this amount in time. A new report by
consultancy firm Copenhagen Economics has estimated that Denmark has missed out on earnings of
10 billion kroner, and 16,000 potential jobs in tourism, since 2000 because it has failed to keep up
with its EU neighbours. However, the good news is that compared with April there were 2,000 fewer
people unemployed, reducing the seasonally adjusted figure for unemployment to 112,700 people, or
from 4.2 to 4.1 per cent of the workforce. However, the gross figure which takes into account both
registered unemployed and those who on job-creation or retraining schemes remained the same.
The new jobless figures were particularly good news for men, who had suffered more from the effects
of the financial crisis than their female colleagues.

Estonia
On 13 July, European finance ministers decided that Estonia would switch to the euro at the current
target exchange rate when it enters the monetary union next year. The kroon will be converted at
15.6466 per euro, the official target since Estonia joined the European exchange rate grid in 2004.
Estonian Prime Minister Andrus Ansip said the inflation rate in July will be much lower than the June
reading. Ansip also promised that Estonia's second-quarter gross domestic product growth would be
one of the fastest rates in the European Union. According to the Economist Intelligence Unit, Estonia
may see its economy grow 3.6 per cent on average next year thanks to a favourable business
environment. Bad news is that compared to 2008, the average monthly gross wages were in 2009 by
5 per cent lower and the average hourly gross wages were by 3.1 per cent lower, which was a first
decrease in annual average monthly salary in 16 years.

Finland
The government of Mari Kiviniemi does not plan to enact massive changes in taxation. Tax increases
set by the Vanhanen government will be adhered to, and slight changes are to be made in energy
taxation. Minister of Finance Jyrki Katainen added that major tax reform could have unforeseen
consequences on the Finnish economy, although it would have been a politically expedient decision.
The Ministry of Finance estimates that thanks to the growth in the global economy and the weakening
of the euro, Finland’s gross domestic product (GDP) will grow more than was forecast earlier this year.
According to the ministry, Finnish GDP will grow in the current year by 1.5 per cent compared with last
year. The GDP growth for 2011 and 2012 is estimated to be 2.5 per cent. In its Economic Bulletin, the
Ministry of Finance points out that large public sector stabilisation packages could reduce demand and
increase unemployment. Finland’s general government deficit-to-GDP ratio is almost at the level



specified in the EU Stability and Growth Pact. The Ministry of Finance does not believe, either, that
Finland’s debt-to-GDP ratio could rise to over 50 per cent by the end of 2012.

France
In the ongoing EADS-Boeing trade saga, EADS has submitted a new bid to build strategic tankers for
the United States Air Force. An earlier bid from EADS with American partner Northrup Grumman was
accepted and then later rescinded after Boeing protested. Initially it was unclear whether EADS would
submit a new bid as it believes that there is a strong bias in favour of Boeing for American military
procurement. This is the latest development in the state aid dispute between EADS subsidiary Airbus
and Boeing which is now before the WTO. Meanwhile, budget cutbacks in Paris are drawing fire. The
French government has committed to cutting its budget deficit by 33 per cent for 2011, a savings of 40
billion euros. However, it still remains unclear which government programmes will be most affected
by the cuts. The budget vote is scheduled to be held on 17 November, however, it is feared that the
unemployed, disabled and students will feel the brunt of austerity. Finally, inflation remained stable
in the month of June and the French economy is on course to have an overall inflation rate of 1.5 per
cent for 2010. Price increases remained stable at 1.4 per cent, but larger increases seen in day-to-day
purchases such as food are off-set by a decrease in prices for big-ticket items such as electronic
equipment and automobiles.

Germany
The euro crisis caused much pessimism in Germany and the country was the source of much
speculation on the dissolution of the common currency. However, statements from leading German
companies and trade figures show that the euro crisis had some benefit. The depreciated currency
had the effect of increasing the global competitiveness of German goods, causing exports to increase
by 11.4 per cent in the first five months of 2010. Der Spiegel has recently found government plans to
deal with the possible insolvency of Eurozone countries. The Ministries of Finance and Justice have
called for the creation of a ‘Berlin Club’ to oversee the ‘orderly insolvency’ of debt-laden Eurozone
countries in which bondholders would be entitled to some, but not all, of their claims. According to
Der Spiegel, there is a belief that a system of dealing with insolvent Eurozone members would not only
reassure bondholders and investors but also send a strong message to states with a penchant for
deficit spending. Preliminary studies of the German banking industry show that all major German
banks will most likely pass EU ‘stress tests’. Deutsche Bank, Commerzbank and Postbank will most
likely pass the stress tests, with all expected to pass the threshold of a 6% Tier I ratio under the stress
scenario. Of the three banks, only Commerzbank received a government bailout during the crisis,
which included a 16 billion euro cash injection.

Greece
The main economic and political event of July in Greece was the voting in by the Parliament of the
new social security bill on 7 July. The bill was solidly supported by the Socialist majority, as well as by
two independent MPs who had been expelled by the conservatives. The bill introduced radical and
harsh changes, especially regarding certain privileges of women and younger members of the
workforce. The minimum retirement age for women went up to 65, while a full pension from now on
will require 40 years of work. A national strike was organised by unions on 8 July. The government



tried to improve certain provisions of the social security bill ahead of the discussion of the individual
articles of the law in Parliament in order to avoid defections in the voting of each article, which it
finally achieved. The new bill though is expected to be challenged by trade unions in Greek and
European courts. Already the State Auditors’ Council in Greece found some of its provisions
unconstitutional. At the same time, trade unions and employer organizations were engaged in a
tough negotiation concerning the new collective labour agreement. The agreement will have to reflect
the changes in labour relations foreseen by the loan agreement Greece signed with the EU and the
IMF, some of which are included in the social security bill. Greece won some praise from the European
Commission for its efforts, but the general economic outlook for the country remains grim: Even
though the economy is expected to contract less than predicted (3-4 per cent GDP reduction, as
opposed to an expected 4 per cent), the OECD predicts that the unemployment rate in Greece will rise
to 12.10 per cent in 2010 and 14.3 per cent in 2011. Tax hikes (especially in VAT) will lead to an
increase of inflation to 6.5 per cent (up from 5.4 per cent in May). Due to the government’s austerity
measures, public expenditure has fallen more than predicted, but government revenue remains less
than expected. Rare positive news came when the European Investment Bank signed a loan
agreement worth 2 billion euros with Greece on 1 July. The loan will particularly help Greece improve
its infrastructure and conditions for long-term growth.

Hungary
An International Monetary Fund (IMF) delegation arrived in Budapest on 6 July for its first review of
Hungary’s progress on complying with terms of a 2008 bailout since Prime Minister Viktor Orban took
the office. The IMF wants Hungary to achieve the 3.8 per cent of GDP budget deficit target this year. In
the meantime, the Hungarian parliament approved a bill loosening budget rules, ignoring the
independent Fiscal Council, which said it would erode fiscal credibility. The bill removes the results of
majority state-owned companies from the budget and widens the government’s ability to forego
supplementary budgets in case of overspending. In an effort to persuade investors the government
can reach its deficit target, Orban announced plans to raise 120 billion forint ($527 million) this year
from a new tax on banks. He also said Hungary would cut public spending, reduce personal income
taxes and lower taxes for small businesses. However, the government failed to reach agreement with
banks on the proposed tax, and none of the other measures have been approved by parliament.
Investors are looking for assurances the government has the political will to stick to its fiscal plans. In
the meantime, six foreign banks with operations in Hungary, KBC, Intesa Sanpaolo, Bayern LB,
UniCredit, Raiffeisen International and Erste Bank, asked the IMF for help, to convince the Hungarian
government not to introduce the special tax to be levied on banks. There are cold vibes between the
International Monetary Fund and the Hungarian government as the cabinet presented its economic
plans as solid facts, showing little flexibility, while the IMF has reservations about the new tax on
banks. It is also critical of the cabinet’s plan to cut the corporate tax rate and says that if the
government wants to lower taxes, it should focus on labour taxes instead.

Ireland
Irish manufacturing output continued to increase in June but the growth rate was the slowest in the
last four months. Although the operating conditions improved, the sector’s input costs have risen due
to the higher cost of raw materials. Additionally, the employment rate fell back in June after signalling
expansion a month before. The net job creation is not expected until 2011 as the unemployment rate



reached 13.4 per cent. Growth has been noted in the number of new business but the increase in the
new export orders was mainly due to external demand. Also, the continuous weakness of the euro
causes inflationary pressures on the market. Irish government seeks extension of the bank guarantee
scheme. Last month Ireland joined Germany, Sweden, Spain, Latvia, Poland and eight other EU
member states in getting its state guarantee scheme approved until the end of June. Ireland is
struggling to manage a heavy sovereign debt burden. The country issued a guarantee for €400 billion
in bank liabilities during the peak of the crisis in September 2008 which was one of the most extensive
of such schemes at that time. The state guarantee was originally planned to last two years. The
Minister of Finance Brian Lenihan has recently stated that the Commission will most probably extend
the scheme under the current terms and conditions until 29 September 2010. Furthermore, the
guarantee will be modified in order to seal prolongation until the end of the year. This move was
caused by the turmoil in sovereign and corporate debt market caused by concerns about the ability of
highly indebted states to service borrowings. Finally, on 7 July the International Monetary Fund (IMF)
concluded the consultation with Ireland and considered that the authorities’ decisive measures to
support the banking sector and advance fiscal consolidation have helped gain policy credibility and
stabilise the economy.

Italy
The income of the average Italian family is decreasing. According to ISTAT, the Italian government
statistics agency, the income of the average Italian family decreased by 2.6 per cent in the first quarter
of 2010 compared with the first quarter of 2009. This is combined with a rise in consumption of 0.5
per cent and a fall of 10.5 per cent in savings and investment. A study has revealed the most and least
expensive cities in Italy. The study, partly commissioned by Unioncamere, the Italian union of
chambers of commerce, shows that Bolzano-Bozen is the most expensive city in Italy, with prices 5.6
per cent above the national average. The study has also revealed that the cheapest city is Naples, with
prices 6.2 per cent below the national average. In general terms, the more expensive places are
located in the northern regions of the country where there greater public spending in areas such as
health spending. The Holy See has registered a deficit for a third year running. Recent figures show a
deficit of 4.1 million euros in 2009. This increase can be attributed to increase expenditures by Pope
Benedict XVI in the execution of his duties and a decrease in donations as a result of the economic
crisis. Benedict XVI’s predecessor, John Paul II, began publicly disclosing the Vatican accounts in an
attempt to show that the Roman Catholic Church was not as a wealthy as rumours had stated.

Latvia
In order to achieve consolidation of next year’s budget (571.4 million euros), cuts will be necessary in
the social sector, said IMF and World Bank consultant Janis Platais. It must be understood that the
state will have less tax revenue at its disposal than previously. Therefore, the only possibility is to
spend less on pensions, healthcare, education, culture. Of course, pensions could be kept at the
current level, but in such an event there would be a lack of money for healthcare. This could be
compensated by giving up reduced VAT rates for medication. In any case, everyone will have to suffer.
Moreover, Latvian legislation states that pensions should be indexed. Assessing reforms to state
structures, the consultant admits that there are many problems which have not been solved. Fair
competition and eradication of the plundering of state resources will have extremely great significance



in Latvia’s exit from the current crisis. vvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvvggg

Lithuania
Lithuanian Prime Minister Andrius Kubilius said that Lithuania is on course to adopt the euro by 2014.
The country is also on track to cut its deficit to 3 per cent of gross domestic product by 2012, which
will require further spending reductions of about 5 per cent of gross domestic product. Lithuania
pushed through one of Europe’s toughest austerity programs last year and in 2010, with budget cuts
averaging a combined 12 per cent of GDP, to bring down the deficit and qualify for the euro. The
measures exacerbated last year’s recession, when output shrank by 14.8 per cent. Recently, the
Lithuanian parliament has also approved plans to reduce parental leave benefits to help narrow the
budget deficit. Now, Lithuania provides 90 per cent of the parents’ salary in their first year of leave
and 75 per cent in the second year. From July 2011, parents who take one year of leave will get 100
per cent of their salary. For those who will stay with children for two years, benefits will be reduced to
70 per cent in the first year and to 40 per cent in the second year.

Netherlands
Caretaker Finance Minister Jan Kees de Jager said that he wants to publish the results of checks of the
so-called stress tests which a number of Dutch financial institutions are undergoing. He said that at
least four Dutch banks are undergoing these tests, but declined to give more details, with the results
due around 23 July. The aim of the stress tests is to find out if the banks have enough capital to
withstand another two years of an economy that may deteriorate. Meanwhile, a majority of MPs have
doubts about whether central bank president Nout Wellink is the right man to push through a ‘cultural
change’ at the bank. Although the caretaker finance minister defended Wellink in parliamentary
debate, MPs from across the political spectrum said the central bank had repeatedly failed to show
enough muscle. MPs were debating a damning report on the collapse of independent bank DSB,
which said the central bank should never have issued it a banking licence. But the bank had also failed
to show enough teeth during the credit crisis, the takeover of ABN Amro bank and the swift rise of
internet savings back Icesave, MPs said. The central bank has been given until 1 August to draw up a
plan to overhaul its operations and implement a ‘cultural change.’ MPs do not have the right to
appoint the central bank president, but a lack of support would be an important signal that he should
go, experts say.

Poland
Economists say that the Polish economy may expand by more than 3 per cent in 2010. According to
the Central Statistical Office, the country's GDP grew by 3 per cent in the first quarter of 2010 in year-
on-year terms. The European Union economy has expanded by just 0.5 per cent. The IMF experts
advise that Poland should continue structural reforms and make sure that public finances are more
flexible and the pension system reform is completed. The victory of Bronislaw Komorowski in Poland’s
presidential elections is not a guarantee that the country will go ahead with vital fiscal reforms. The
experts claim that the ruling Civic Platform party Komorowski belongs to will not be willing to risk
introducing extensive reforms before the next year’s parliamentary elections. Also, the country’s
manufacturing output grew for the seventh consecutive month. It increased by 14 per cent in May
2010 compared to May 2009 – mainly due to growing inventories and exports. Although growth in



exports means that Polish products are competitive on international markets it may also be a sign of
weakening of the zloty. Meanwhile, Marek Belka, chief of the National Bank of Poland (NBP), urges the
government to tackle the budget deficit as it may soon result in investors’ interest in Polish bonds
weaken significantly. According to the NBP’s calculations the country’s debt amounted to 220 per
cent of GDP. This number considers all the state’s hidden financial obligations that are rarely
considered in book keeping – social benefits system, healthcare and other conditional responsibilities.
Poland still does not meet many of the criteria required to join the euro zone. In the worst case
scenario, the adoption of the common currency will take place no sooner than in 2019. This
assumption depends on such volatile factors as government declarations, macroeconomic situation
and the reliability of economic policy. Currently Poland meets only one of the four criteria – long-term
interest rates. The country is still not a part of the European Exchange Rate Mechanism and does not
fulfill the price stability or the fiscal criteria due to the excessive deficit – 7.1 per cent of GDP in 2009.
Therefore, economists find the Polish government’s goal of euro adoption in 2012 unlikely.

Portugal
According to information released on 13 July 2010, Portugal’s bond rating was downgraded again by
Moody’s, from Aa2 to A1. Moody’s stated that the Portuguese government’s financial strength will
continue to weaken over the medium term. The Portuguese economy’s growth prospects are likely to
remain relatively weak unless recent structural reforms bear fruit over the medium-to-longer term.
This fresh cut in the government’s credit rating is the latest installment in the saga of Portugal avoided
a Greek-style debt crisis. The government has slashed government spending and arranged a bond
auction in the hopes of calming investors. This latest change in Portugal’s debt rating has affected the
euro. Currency trading on the morning on 13 July saw the euro continue its decline, falling 0.5 per cent
at 8.30 GMT, to US$1.2536. This announcement falls on the heels of a somewhat successful six-
month bond sale in the beginning of July. The sale of the bonds maturing in January 2011 carried an
average yield of 1.947 per cent, down from an average of 2.955 per cent in the bond sale in May. The
lower yield was interpreted as increased confidence in the Portuguese economy; however the
lowering of the credit rating clearly shows tough times ahead for the Socrates government.

Romania
The fifth instalment from Romania's stand-by agreement with the International Monetary Fund was
sent on 7 July to the Romanian Central Bank's reserve. An IMF mission will arrive in Romania on 26 July
to evaluate whether Romania has fulfilled the conditions assumed in the stand-by agreement and to
discuss the economic targets for the next year with the authorities. The IMF team will go through the
stage of the recommendations submitted last year by another team and will advise the Romanian
National Agency for Fiscal Management (ANAF) on better ways to use the instruments made available
by information technology. Earlier, the IMF Managing Council approved the rectification of the
inflation rate for 2010 from 3.5 per cent to 7.9 per cent, after Romanian authorities raised the VAT
from 19 to 24 per cent. IMF chief of mission to Romania Jeffrey Franks noted that the IMF board were
impressed by the speed at which the Romanian Government found an alternative after the
Constitutional Court ruled out the cut in pensions was unconstitutional. Asked whether a cut in
pensions would have been more adequate, Franks gave a negative answer, saying that the Fund
proposed an increase in taxes during the last visit. The IMF is now waiting for a clear sign from the
Romanian Government to start discussions on a new agreement, which could start within the coming



months. Meanwhile, Romania's unemployment rate has dropped for a third month in a row, down to
7.44 per cent in June from 7.67 per cent in May, as announced by the National Unemployment
Agency. The rate is lower than the average euro zone unemployment rate of 10 per cent reported by
Eurostat in May.

Slovakia
Slovakia’s new centre-right government, which was sworn in on 9 July, faces a challenge to bring the
rapidly-growing public debt under control. The state budget deficit for the first six months of 2010 has
already amounted to 65 per cent of the full-year budget. It means that meeting the original full-year
target would require that government expenditures not exceed revenues by more than 1.3 billion
euros in the second half of the year. This, according to some analysts, could be possible only through
timely and restrictive measures. On European affairs, the framework agreement on the European
Financial Stability Facility (EFSF) needs Slovakia's signature in order to become operational. If signed,
Slovakia’s share in the package will amount to 4.37 billion euros. The new Slovak government backed
a stabilisation mechanism for Eurozone countries but backed away from a separate euro-area
countries' bail-out loan to Greece. Slovakia’s portion of the Eurozone’s multi-billion-euro emergency
rescue package will not change, said Slovakia’s new Prime Minister Iveta Radičová after talks with the
president of the Eurogroup of eurozone finance ministers, Jean-Claude Juncker, in Brussels on 13 July.
According to Ms Radicova's spokesman, Rado Bato, Slovakia will demand a ‘binding agreement’ of the
Eurozone countries that they reform their banking sector and the EU's Eurostat statistics office,
amongst other measures.

Slovenia
The first quarter of 2010 saw no signs of economic recovery : GDP declined by 0.5 per cent in real
terms compared with the previous quarter and year-on-year (by 1.2 per cent), which shows that
economic activity dropped to the lowest level since the beginning of the economic and financial crisis.
A recent meeting of representatives of the government, construction companies and banks ended
with a promise that the government would provide short-term aid to Slovenia's troubled
construction sector primarily through the launch of certain investments. A special bank loans scheme
for builders was not discussed. The Slovenian parliament passed an act on state guarantees for
securing financial stability in the Eurozone, which forms the legal framework for Slovenia's
participation in mechanisms of financial aid, as well as an act enabling Slovenia's participation in the
Eurozone's bailout package for Greece. Parliament also passed the supplementary budget for this
year whose aim is to keep Slovenia's budget deficit at 5 per cent of GDP at the close of an emergency
session dedicated to the budget. Later, the biggest opposition party, the Democrats (SDS), presented a
fourth package of measures to boost the economy. Unlike the previous proposals, which included
mostly long-term measures, the new package focuses on short-term measures. Finally, Slovenia's
inflation rate dropped by a further 0.2 percentage points to 1.9 per cent at the annual level in June
despite consumer prices rising by 0.3 per cent at the monthly level, the Statistic Office reported.

Spain
Spain announced politically unpopular labour and pension reforms in the face of financial market
pressure on Eurozone states to clean up their finances. The country even won praise from German



Chancellor Angela Merkel after the cabinet in Madrid approved a decree to overhaul rigid hire-and-fire
laws intended to restore economic competitiveness. EU leaders denied a report in the Spanish
business newspaper El Economista that the United States, the EU and the IMF were preparing a 250-
billion-euro credit line for Spain. Furthermore, the country also decided to open its troubled savings
banks to private investors, acting to limit political interference in a sector plagued by bad property
loans as it stepped up efforts to overhaul its financial system. The new law, which the government said
opposition lawmakers would approve, complements an ongoing consolidation of Spain's unlisted
regional lenders, known as ‘cajas.’ Although the cajas avoided the meltdown stemming from toxic U.S.
mortgage-related assets during the first part of the financial crisis, they are heavily exposed to Spain's
own property crash. Economy Minister Elena Salgado said that the consolidation process is virtually
complete and has shrunk the network of 45 savings banks to 19, all of which EU stress tests had shown
were solvent.

UnitedcKingdom
The country’s deficit reached the record high of 11 per cent of GDP in the 2009-2010 fiscal year. The
Labour government failed to repair public finances. It created the need for the George Osborne’s
emergency budget that was delivered on 22 June. Mr Osborne, the Conservative Chancellor of the
Exchequer, set an objective of balancing the cyclically adjusted current budget within five years. He
took the overall fiscal consolidation to 6.3 per cent of GDP during this parliamentary term. He has
decided that the VAT rate will be raised from 17.5 per cent to 20 per cent in January 2011 which
should result in the 0.8 per cent GDP increase in 2011-2012. The bulk of the fiscal tightening will derive
from spending cuts, including cuts in welfare. This will increase their contribution to the overall
retrenchment to 4.6 per cent of GDP. Additionally, government spending will fall from over 47 per
cent of GDP in 2009-10 to under 41 per cent, and borrowing from the current level of 11 per cent of
GDP to 2 per cent. The gravest error in this budget seems to be walling off health, leading to
enormous cuts on other departments – average of 25 per cent by 2014-15. Without the ring-fencing,
the cuts would be at 14 per cent. Britain still has a long way to recover from the six-quarter recession.
Excess capacity and banks’ continuous reluctance to lend could result in dampening business. Also, UK
interest rates maintained at 0.5 per cent - a record low level since March 2009. Moreover, the Bank
of England's Monetary Policy Committee decided not to inject any more money into the economy
under its policy of quantitative easing while the calls have been growing for an increase in rates to
curb inflation. According to the estimations by the National Institute of Economic and Social Research
(Niesr) the British economy grew by 0.7 per cent in the three months to the end of June - a slowdown
from the 0.9 per cent expansion seen before. The Consumer Prices Index reached a 17-month high of
3.7 per cent in April. It fell back to 3.4 per cent in May but remains well above the Bank of England's 2
per cent target.



WORLDWIDE
China
While European and American banks were suffering from the crisis, China transformed itself from an
indebted communist bureaucracy into something resembling a mature market economy. This
transition has been completed by the Agricultural Bank of China – the last of the five large state-
owned banks - to list. Currently, four of the world’s ten largest banks according to their market value
are Chinese. Six years ago, this number was zero. The finance sector has tremendous potential in
China as only less than 1 per cent of AgBank’s retail customers have mortgages. Chinese banks – being
largely under government’s protection – did not suffer too much from the crisis. The system is to a
large extent closed. Foreigners have minority stakes in Chinese companies but their own operations
have less 1 per cent by profits of a market share on the mainland. Also, Chinese banks make less than
4 per cent of their profits abroad.
Inflation may soon become a serious threat to China, with the 2009 extreme credit expansion likely to
cause prices to increase. China’s GDP growth will most probably remain strong at approximately 10.5
per cent in the second quarter of 2010. The country’s industrial production is expected to have
diminished slightly from 16.5 per cent in May to 15 per cent in June 2010. China has noted a surge in
the trade surplus and exports, beating market expectations. Exports for June increased by 43.9 per
cent on the same month in 2009 last but the $20bn trade surplus is so far the largest in 2010. The
experts say that the effect of the European debt crisis had not been as bad as they expected. These
records are first since China’s last month’s decision to allow its currency to trade more freely against
dollar following Western politicians arguments that yuan is undervalued and gives China an unfair
trading advantage. The strong June trade figures may therefore trigger further relaxation in yuan
controls. A stronger currency would dampen Chinese exports and boost home consumer spending on
cheaper imported products.

Iraq
The oil sector provides 95 per cent of the government revenue and employs only 1 per cent of the
workforce. Beyond oil, Iraq does not export much of anything. It is an industrial pygmy that is noted as
the 175th out of 183 countries surveyed by the World Bank for ease of starting a business. According to
the IMF, the country's economy has grown by more than 7 per cent in 2010 – mostly due to
investment by foreign oil companies. Most Iraqis still do not have full-time jobs. Banks charge up to 20
per cent in interest on small loans and sometimes demand 300 per cent in collateral should they need
to recoup capital in a fire sale. The central bank was bombed on 13 June and the state Trade Bank of
Iraq a week later, killing a total of 44 people. These attacks will probably result in even more reticent
banks.

SouthcKorea
The South Korean central bank has unexpectedly increased interest rates to 2.25 per cent for the first
time since the outbreak of the financial crisis. Before this increase the rate was at the record low level
of 2 per cent. The country’s central bank gave no clear indication of its future policy moves but it is
probable that the gradual tightening will continue reaching the 3 per cent level by mid-2011. This



decision follows similar ones made in Canada, Australia, Malaysia and India. Unlike many Asian
economies, majority of developed countries are not yet confident enough of a sustained economic
recovery to raise the cost of borrowing. According to the Bank of Korea’s forecast the South Korean
economy – already third largest in Asia – will continue to expand in 2010 at the fastest rate since 2006.
Even the presence of overseas risks will not stop the positive trends in Asian economies. Both South
Korean government and the central bank seem to be increasingly confident about economic prospects
and concerned about the possible inflation risks.

UnitedcStates
Hopes that a lower trade deficit was indicative of economic recovery have come into doubt. Since
January 2010, the trade gap has shrunk by US$700 million, however, analysts believe that this decline
could be attributed to low imported oil prices rather than an increase in exports. Various key figures in
the decentralised Federal Reserve have publicly stated that the central bank system has no plans for
further monetary easing. President of the Richmond Federal Reserve Jeffery Lacker believes that the
Federal Reserve has done what is reasonably necessary and that ‘*it+ would take a very substantial,
unanticipated adverse shock’ for further action to be appropriate. Partisan squabbling is preventing
aid for the unemployed that was first proposed by the Democrats in a wider employment bill in
November 2009. But even with the unemployment rate stuck well above 9 per cent, the bill, which
was approved by the House of Representatives, has run aground in the Senate as Republicans and
some conservative Democrats balk at further inflating the federal debt. Even after Democratic leaders
cut the total cost of the legislation in half to about US$100-billion, they still came up a few votes short
when they tried to pass the measure before breaking for a week after the 4 July holiday.

INSTITUTIONS
G-20: Leaders from the world’s top 20 economies met in Toronto on 26-27 June for a crucial meeting
on the future of the world economy. A strong push for fiscal consolidation and the rebalancing of the
global economy, a bank levy and financial reform made for a packed agenda. The first and foremost
challenge for leaders was to ensure confidence so that global recovery will not be derailed. They
expressed strong support for the determined actions taken by the EU to safeguard stability and
growth in Europe. Leaders agreed to continue to resist protectionist pressures and refrain from raising
trade and investment barriers, and agreed on the need to complete the Doha Development Round of
negotiations. World leaders faced a complicated task in Toronto. On the one hand, there are signs of
economic recovery, especially in Asia, from which the EU will no doubt benefit, but on the other hand
aggregate global domestic demand is looking much gloomier. Leaders in the end agreed on the
importance of a coordinated approach at global level that combines carefully calibrated and growth-
friendly fiscal consolidation with following through on fiscal stimulus, tailored to national
circumstances. Participants agreed to specific minimum targets for deficit reduction and the
stabilisation and reduction of debt. The G20 Toronto Summit Declaration was released following the
conclusion of the G20 Summit meeting.



ECOFIN Meeting: During the ECOFIN meeting on 12 July the Economic and Finance ministers were
not able to come to many conclusions, especially not in the field of the tax package. The Council
adopted a political guideline for continuing negotiations with the European Parliament on the reform
of financial supervision in Europe. The EU finance ministers endorsed a demand of the British
Chancellor George Osborne that the European Banking Authority, one of three EU financial
supervisory bodies, should be set up in London, not in Frankfurt. EU finance ministers agreed to hand
the Belgian EU presidency a new negotiating mandate on the EU's financial supervisory package, in a
fresh bid to secure an agreement with the European Parliament by this September. Parliament last
week delayed a vote on the package, giving time to Member States to moderate their position on the
roles of three new agencies in the banking, insurance and financial market sectors. A deal in
September is needed so that the new bodies can be up and running by 1 January 2011. The Council
took a decision authorising Estonia to adopt the euro as its currency with effect from 1 January 2011,
and to this end definitively fixed the conversion rate between the Estonian kroon and the euro. The
Council established broad economic policy guidelines under the new Europe 2020 strategy. In the
context of initiatives under way with the aim of improving the economic governance of the European
Union, it gave the go-ahead for the introduction of a "European semester" for the surveillance of the
budgetary and structural policies of the Member States. The Council also opened excessive deficit
procedures in relation to Bulgaria, Cyprus, Denmark and Finland, making recommendations on the
measures to be taken to reduce their deficits to below the reference value of 3 per cent of gross
domestic product. The Council has also completed the legislative procedure relating to the SWIFT
agreement, by concluding an agreement with the United States on the transfer of financial messaging
data for the purposes of the Terrorist Finance Tracking Program. . EU finance ministers will also hold
substantive discussions on a Europe-wide bank levy and tax on financial transactions in September.

European Parliament: Members of the European Parliament have accused national governments
of seeking cuts to the European Union's budget that would undermine attempts to spur economic
growth. Ambassadors from the Member States have agreed to a draft budget for 2011 of €126.58
billion, €3.6bn less than the draft budget presented by the European Commission in April. Sidonia
Jedrzejewska, a Polish centre-right MEP who is preparing the Parliament's position on the 2011
budget, pointed out that the budget lines concerned were supposed to pay for the Europe 2020
strategy, which aims to boost competitiveness and stimulate growth. In the meantime, MEPs have
called for a ’European youth guarantee’ aimed at ensuring that young unemployed people do not
remain jobless for more than four months. European deputies signed the resolution as figures show
that more than 5.5 million under 25 year-olds were unemployed in December 2009 - equivalent to
21.4 per cent of all young people in Europe......

European Commission: The European Commission has come forward with proposals to step up
the protection of bank deposits. The package of plans presented on 12 July by the European
Commissioner for the Internal Market and Financial Services, Michel Barnier, also aims to protect
investors from Bernie Madoff-style fraud events, by reforming current EU legislation in the area. For
those who lose out due to fraud such as pyramid schemes or administrative malpractice, the new rules



would increase compensation from €20,000 to €50,000. A third component to Monday's initiative saw
the Commission publish a White Paper on insurance guarantee schemes, designed to provide last-
resort protection to consumers when insurers are unable to fulfill their commitments. An EU plan for a
global levy on banks to pay for future bank bail-outs failed to win support at last month's G20 meeting
in Canada, although European officials have vowed to push ahead regardless. The European
Commission also published a report on labour market and wage developments in 2009 and a Green
Paper on adequate, sustainable and safe European pension systems. On 30 June, the European
Commission tabled new economic governance plans to strengthen the Stability and Growth Pact,
proposing to cut EU farm payouts for countries found to breach the rules.

European Council: The outgoing Spanish EU Presidency will be remembered for overseeing the
first steps towards a ‘necessary and absolutely essential’ evolution from monetary union to economic
union, Rafael Dezcallar de Mazarredo, Spanish Ambassador to Germany, told EurActiv Germany in a
recent interview. Spain's six-month tenure at the EU helm, which came to an end in June, witnessed a
series of EU-level discussions on proposals for budget supervision and possible sanctions for member
states that do not respect the rules. Belgium, which took over the European Union's six-month
presidency on 1 July, wants an EU deal on a bank tax by the end of the year, Finance Minister Didier
Reynders said in a newspaper interview on 4 July. On EU economic governance, Reynders said this had
to protect jobs as well as the environment. On public debt and deficits, he said stability pact rules had
to be applied with the same rigour to all EU states and sanctions must be made more automatic.
Reynders said he opposed taking away EU agricultural funds from states which did not obey EU public
finance rules. The European Commission has proposed such a plan.

EPP Views

EPP MEP Salvador Garriga has been appointed the rapporteur for the new European Parliament
special committee for financial and budgetary resources beyond 2013. This special committee was
created in order to ascertain the political priorities of the European Parliament for the next Financial
Perspective which will come into force in 2013. As well, the EPP Group gave its approval to the SWIFT
agreement with the United States, leading to its passage in the European Parliament. ‘After the
addition of Parliament's fundamental requests, the EPP Group gave its consent to this new Agreement
in order to prevent and fight terrorism in Europe and find transactions by terrorist groups all around
the world,’ said EPP Group Vice-Chairman Manfred Weber MEP, EPP Group Coordinator in the
Committee of Civil Liberties Simon Busuttil MEP, and EPP Group Shadow Rapporteur Ernst Strasser
MEP, after the EP vote today in Strasbourg. ‘We made all the efforts possible in order to guarantee a
binding twin-track approach to establish a European TFTP in a short delay, in order to permit the
extraction of data on EU soil and thus stop the transfer of bulk data to the US. In fact, this new
Agreement will be transitional until the European Union creates its own system for the investigation of
terrorist financing,’ Weber, Busuttil and Strasser explained.



OUR COMPETITORS’ VIEWS
The Socialist and Democrat Group in the European Parliament agreed to the passage of the SWIFT
agreement, with some reservations. S&D leader Martin Schulz said, ‘During the last months the
European Parliament was strong enough to say no to a 'security without safeguards' deal. It is the duty
of the EU and the US to cooperate in protecting citizens from terrorism, but citizens have also the right
to be protected against excessive state intrusion into their lives and potential mistakes.’ Schulz also
lamented an alleged lack of progress at the G20 Summit in Toronto. Not only was there a lack of
progress according to the S&D Group leader, but there was also that unequivocal call for the EU to
unilaterally adopt a bank tax. According to Schulz: ‘This meeting of the leaders of the 20 wealthiest
nations in the world over the week-end in Toronto has raised many expectations in Europe but was a
complete failure. The coordinated excessive budget cuts by European governments are pushing the
world in the wrong direction. This austerity policy is raising the threat of plunging back into recession.
On top of that, the summit missed the opportunity to introduce a banking tax and a financial
transaction tax to put the costs of the crisis where they belong. This is a real disappointment. The EU
should nevertheless take the lead and go ahead with a banking tax and a financial transaction tax,
despite opposition from its partners.’

FROM THE BLOGOSPHERE…
Could Greece come right after all? Gideon Rachman elaborates on the idea of Greeks surprising the
world dealing with their political and economic problems

Euro zone currency crisis is only beginning Charlie Fell wonders what will be the consequences of the
banking crisis.

Testing the European banks' stress tests The Economist’s blogger comments on the Europe’s
committee of bank supervisors’ decision to set criteria for the largest banks’ abilities to withstand
a downturn.

Editor: Roland Freudensteinffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffffff
Research Assistance: Katarína Králikovácccccccccccccccccccccccccccccccccccccccccccccccccccccccccccc
Additional Assistance: Angelos Chryssogelos, Diana Wasilewska, Ioana Lung, Giovanni
Mastrobuonovvvvvvvvvvvvvvvvv ,,,,,,,,,,,
Design: José Luis Fontalbaccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccccc
Questions and comments: kkralikova@thinkingeurope.eu



ANNEX

ECFIN Economic Briefs
Edited by Marco Buti

Strategies for a post-crisis world: enhancing European growth

Keynote speeches at the Brussels Economic Forum 2010

The 11th Brussels Economic Forum, held on 25-26 May 2010, took place against a background of the
Greek debt crisis and keen debate on the future of Europe's economic governance. In that sense it
took place at the ideal moment. Participants debated the causes and consequences of the crisis, and
the best way to spur economic growth in Europe, including on how to make growth greener and more
sustainable.

This special edition of DG ECFIN's Economic Brief series reproduces the keynote speeches from the
conference.

Speakers:

Olli Rehn, European Commissioner for Economic and Monetary Affairs
Herman Van Rompuy, President of the European Council
Elena Salgado, Second Deputy Prime Minister and Minister of Economy and Finance, Spain
José Manuel Barroso, President of the European Commission
Connie Hedegaard, European Commissioner for Climate Action
Mario Monti, President, Bocconi University

To read Keynote speeches at the Brussels Economic Forum 2010, click here.

(ECFIN Economic Briefs. 9. July 2010. Brussels. pdf. 28pp. Tab. Graph. Ann. Bibliogr. Free.)
KC-AY-10-009-EN-N ISSN: 1831-4473)


Single Market 2.0: EU Focuses on Completing Single Market for Economic Recovery

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