Restoring growth and forging a stronger union

Portugal needs to increase the number of goods and services taxed at the standard VAT rate, European Commission recommends.

EU leaders agreed on measures to restore confidence in the economy, invest more in growth and establish a stronger union during a summit on June 28 and 29.

Commission president José Manuel Durão Barroso announced that the European Council had delivered what “our citizens, our international partners and the markets have been asking for”.

Eurozone countries endorsed common supervisory oversight of their banks involving the European Central Bank (ECB), which has been described as a key step to restoring stability.

The eurozone’s bailout fund will also be allowed to directly help refinance troubled banks. Currently, governments must ask the fund for loans and then in turn loan the money to their banks.

National governments asked Council president Herman Van Rompuy to develop a plan for closer economic and monetary union in collaboration with the presidents of the Commission, the Eurogroup and the ECB.

The plan would include common rules for supervising the financial sector, keeping national budgets within agreed limits and closer economic policy coordination.

The EU as a whole also agreed on a compact for growth and jobs, with plans to invest €120 billion in economic stimulus. In a recent report, the Commission said it would be monitoring the impact of tight budget constraints on growth enhancing public expenditure and on public investment while the EU would be doing everything necessary to put Europe back on the path of smart, sustainable and inclusive growth.

The funds include additional capital for the European Investment Bank, which will expand its overall lending capacity by €60 billion. The bank, said a press report from the Commission, will use funds for projects that develop innovation and skills, small businesses, clean energy and modern infrastructure across the EU.

The EU will invest about €5 billion in project bonds, which will be used to co-finance the construction of transport, energy and broadband infrastructure.

Another €55 billion, continued the report, would be redirected from unused EU regional funds to support small businesses and create jobs for young people.

EU leaders endorsed the Commission’s country-specific recommendations (see panel) on economic policy and budget priorities over the next 12 months.

European Commission’s recommendations for Portugal

A report by the European Commission stated that Portugal had made good progress on a number of fronts, but significant challenges remained. Recommendations include:

• Achieving the fiscal targets if the government is to regain full market access within the programme period.

• To limit the risks to the 2012 fiscal targets, rapid and determined implementation of the structural-fiscal measures of the programme is paramount.

• The government needs to focus on reforms that address Portugal’s competitiveness challenges

• Portugal needs to adopt promptly additional structural reforms in the labour and product markets with a view to reducing labour costs, increasing flexibility and lowering entry barriers.

• Given the large external debt Portugal has accumulated, very substantial further adjustment of a structural nature is required.

• Two thirds of the measures are on the expenditure side and include a significant cut of public sector wages and pensions, a reduction in the number of government employees by 2% (full-time equivalent) and a rationalisation of state-owned enterprises.

• On the revenue side, the budget envisages a reduction in tax exemptions, an increase in the number of goods and services taxed at the standard VAT rate, higher personal income and corporate taxes, an increase in excise taxes and enhanced efforts to fight tax evasion and fraud.

On track: The far-reaching and ambitious reform agenda is on track in the areas of labour market, health care, housing, judiciary and the insolvency and regulatory framework including competition. Also, privatisations so far have been highly successful.

Off track: In network industries, progress was more mixed. In particular, in the energy sector a comprehensive strategy to eliminate the sector’s rising debt by tackling excessive rents remains to be fleshed out.

In progress: A strategic re-programming of the Structural Funds is underway, with a focus on support to youth employment and competitiveness (in particular SMEs). The new measures strengthen actions in the areas of employment passport, training and professional qualifications and access to finance for Small and Medium Enterprises.