EU action on Britain over budget deficitBy Ambrose Evans-Pritchard
Last Updated: 1:42am BST 09/07/2008
European Union finance ministers have voted to condemn Britain for flagrant breach of the Maastricht spending rules, irked that the UK government has not even tried to keep its budget deficit below the treaty limit of 3pc of national income.
By its own admission, Labour will need to borrow at least 3.2pc of GDP this year, even if the economy holds up well. Brussels described this as "prima facie evidence of a planned excessive deficit". It warned that UK public finances were no longer on a sustainable course after the spending blitz of recent years.
Yesterday's vote is the first time the EU has launched disciplinary action against a big Western state under the revamped Growth and Stability Pact.
While France and Germany both violated the old pact, they did so at the bottom of the dotcom mini-slump.
Britain's sins are more serious. The breach has occurred at the top of the cycle when tax revenues should be at their peak. Brussels said there had been a "deterioration of the structural balance of 4.5pc of GDP" since 1999. Brussels said Britain did not qualify under the "exceptional" circumstances clause.
The humiliating verdict came as Slovakia won approval to adopt the euro at the beginning of next year as the 16th member of Europe's monetary union. The country will join at an exchange rate of 30.126 koruny.
Fitch Ratings yesterday raised the country's sovereign debt from "A" to "A+". "Fitch considers euro adoption as a net positive for a country's external creditworthiness. As a member of the euro area, Slovakia will be sheltered from monetary shocks and the risk of a self-fulfilling currency crisis," it said.
With just 5m people, Slovakia will scarcely make a ripple in the eurozone. Its accession will make life marginally more difficult for the European Central Bank, which is already struggling to manage the chasm between the German and Latin blocs.
The ECB has been trying to slow down the pace of expansion, warning east European candidates that it is hazardous to join the one-size-fits-all interest rate regime before they have carried out root-and-branch-reform of their economies.
The UK now has the worst fiscal profile of any developed country in the North Atlantic sphere.
The European Commission expects the UK's public debt to rise from 43.2pc of GDP last year to 47.5pc by the end of next year. The ritual of naming and shaming at EU meetings is likely to prove a constant thorn in the side for Labour.
There is no chance that the deficit can be brought back under control in the foreseeable future. The deficit always deteriorates in a downturn. Capital Economics said borrowing needs could explode to £120bn a year if the country tips into a severe recession, as many now fear.
Britain is now in an ugly predicament. Unlike Spain or the US, it cannot easily resort to a fiscal boost - either tax cuts or extra spending - to cushion the effects of the property collapse.
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