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Spain and Slovenia told to reform economies now or risk financial crisis Spain and Slovenia told to reform economies now or risk financial crisis
(6 months later)
Spain and Slovenia have been given a stark warning by their eurozone partners to reform their economies rapidly or risk financial crisis.Spain and Slovenia have been given a stark warning by their eurozone partners to reform their economies rapidly or risk financial crisis.
In a hard-hitting report on the countries facing macroeconomic imbalances, such as overvalued housing markets or hefty government debts, the European commission identified a total of 13 member states – including France, the Netherlands and Belgium – which it said should take urgent action to restore the health of their economies.In a hard-hitting report on the countries facing macroeconomic imbalances, such as overvalued housing markets or hefty government debts, the European commission identified a total of 13 member states – including France, the Netherlands and Belgium – which it said should take urgent action to restore the health of their economies.
The large number of countries involved underlined the growing scale of the eurozone crisis, which has been exacerbated by a deep recession in many of the single currency's 17 member states. Christine Lagarde, managing director of the International Monetary Fund, warned on Wednesday of the emergence of a "three-speed" global economy, lumping the eurozone and Japan in the slowest lane among countries that "still have some distance to travel".The large number of countries involved underlined the growing scale of the eurozone crisis, which has been exacerbated by a deep recession in many of the single currency's 17 member states. Christine Lagarde, managing director of the International Monetary Fund, warned on Wednesday of the emergence of a "three-speed" global economy, lumping the eurozone and Japan in the slowest lane among countries that "still have some distance to travel".
The European commission's harshest criticism was reserved for Spain and Slovenia, which were warned to agree reform proposals with Brussels next month or face potential sanctions under the EU's new "excessive imbalance procedure".The European commission's harshest criticism was reserved for Spain and Slovenia, which were warned to agree reform proposals with Brussels next month or face potential sanctions under the EU's new "excessive imbalance procedure".
Slovenia, which has been forced to bail out its banking sector, has repeatedly been identified as the next domino to fall in the ongoing eurozone debt crisis, since Cyprus received a controversial bailout.Slovenia, which has been forced to bail out its banking sector, has repeatedly been identified as the next domino to fall in the ongoing eurozone debt crisis, since Cyprus received a controversial bailout.
The commission warned that the close connection between Slovenia's partly state-owned banks, which made reckless loans during the boom years, and the country's public finances could jeopardise financial stability. "These challenges require urgent action in the areas of the financial sector, state-owned enterprises and microeconomic reforms in order to prevent a situation in which severe imbalances would steeply increase towards unsustainable levels," it said.The commission warned that the close connection between Slovenia's partly state-owned banks, which made reckless loans during the boom years, and the country's public finances could jeopardise financial stability. "These challenges require urgent action in the areas of the financial sector, state-owned enterprises and microeconomic reforms in order to prevent a situation in which severe imbalances would steeply increase towards unsustainable levels," it said.
Madrid also came under the spotlight. The commission warned that while the immediate threat of a full-blown international bailout had receded, the heavy debt hangover from Spain's pre-crisis boom continued to present a serious threat.Madrid also came under the spotlight. The commission warned that while the immediate threat of a full-blown international bailout had receded, the heavy debt hangover from Spain's pre-crisis boom continued to present a serious threat.
The report formed part of the commission's new Macroeconomic Imbalances Procedure, put in place in the wake of the financial crisis to identify problems within individual countries that could put the financial stability of the eurozone at risk.The report formed part of the commission's new Macroeconomic Imbalances Procedure, put in place in the wake of the financial crisis to identify problems within individual countries that could put the financial stability of the eurozone at risk.
Brussels stepped up the pressure on France over declining exports and rising public debt, saying the country's "public sector indebtedness represents a vulnerability, not only for the country itself, but also for the euro area as a whole".Brussels stepped up the pressure on France over declining exports and rising public debt, saying the country's "public sector indebtedness represents a vulnerability, not only for the country itself, but also for the euro area as a whole".
The IMF recently warned that France could slip behind Italy and Spain if it failed to reform its struggling economy.The IMF recently warned that France could slip behind Italy and Spain if it failed to reform its struggling economy.
The UK also came in for criticism from the commission, which warned that the hoped-for recovery in the housing market could halt a necessary "correction" in prices, and prevent a reduction in household borrowing levels. That could leave homeowners dangerously exposed in future if interest rates go up, it warned.The UK also came in for criticism from the commission, which warned that the hoped-for recovery in the housing market could halt a necessary "correction" in prices, and prevent a reduction in household borrowing levels. That could leave homeowners dangerously exposed in future if interest rates go up, it warned.
"As a consequence of a combination of high house prices and the widespread and growing use of variable-rate mortgages, households are particularly exposed to interest rate changes," it said, adding that the size of the UK economy meant future instability could, "generate spillovers to the other European economies"."As a consequence of a combination of high house prices and the widespread and growing use of variable-rate mortgages, households are particularly exposed to interest rate changes," it said, adding that the size of the UK economy meant future instability could, "generate spillovers to the other European economies".
The Commission's verdict came as details began to leak of the conditions Cyprus could face in exchange for its €10bn bailout. Nicosia is expected to be forced to sell €400m-worth of gold reserves as part of the deal.The Commission's verdict came as details began to leak of the conditions Cyprus could face in exchange for its €10bn bailout. Nicosia is expected to be forced to sell €400m-worth of gold reserves as part of the deal.
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