* EU Commission raises concerns about France, Italy, Spain
* Worries focus on imbalances over debt, banking, export
* Spain and Slovenia need to boost competition, consolidate
* France's high debt, lack of export share a growing problem
By Jan Strupczewski and Martin Santa
BRUSSELS, April 10 The European Commission
warned of deepening economic problems in France, Italy and Spain
on Wednesday, and said Slovenia must take urgent steps to offset
the risk of a wider destabilisation across the euro zone.
Unveiling its second review of economic imbalances in 13
European Union countries, the Commission flagged concerns about
France and Italy, while including Spain and Slovenia among
countries that could face fines if they do not correct course.
The early warning system was set up after problems in
Greece, Ireland and Portugal triggered the euro zone sovereign
debt crisis and forced the bailing out of four member states.
"(In) Spain and Slovenia, imbalances can be considered
excessive," said the Commission, mentioning problems with high
deficits and public debt levels, imbalances in the banking
system and in labour market structure and costs.
In Spain, which had to borrow 40 billion euros from the euro
zone last year to recapitalise its shattered banks, it said very
high domestic and external debt levels posed serious risks for
growth and financial stability.
"Although adjustment is taking place, the magnitude of the
necessary correction requires continuous strong policy action,"
the Commission said. Under the macroeconomic imbalances
procedure, a country that does not take steps to remedy
excessive imbalances can be fined 0.1 percent of GDP by the EU.
Perhaps more concerning are growing signs of imbalance in
France and Italy, the euro zone's second and third largest
economies, even if they are not yet deemed "excessive".
If those problems were to worsen, it would signify that
almost no EU economy, save perhaps Germany, is immune from the
impact of the debt crisis, and borrowing costs across the region
would be likely to rise in reflection of that risk.
The Commission described France's resilience to external
shocks as "diminishing" and its medium-term growth prospects as
"increasingly hampered by long-standing imbalances".
France's share of the EU's export market declined by 11.2
percent between 2006 and 2011, the report said, while rising
unit labour costs have eaten away at Its competitiveness.
"It is necessary for us to reduce risk adverse effects on
the functioning of the French economy and the whole euro zone,"
economic affairs commissioner Olli Rehn told reporters, citing
France's deteriorating export performance and high public debt.
"Why so? Because France is a core country, France is, in
terms of its size and economic position, a very significant
member of the euro zone."
French President Francois Hollande promised on Wednesday to
stick with deficit-cutting plans despite a growing revolt within
his government over reductions that critics say bow too much to
German demands for austerity.
The EU had similar words of warning for Italy, where public
debt is forecast to rise to 130 percent of GDP, far above the
level considered sustainable, although the Commission also said
its budget deficit was largely in check.
SPAIN AND SLOVENIA
Spain and Slovenia, seen at risk of being the fifth euro
zone country to need a full sovereign bailout, could face fines
if they are unable to correct imbalances in their economies.
"Developments over the last year, including further
contraction in economic activity, rising unemployment, and the
need for public support for the recapitalisation of a number of
banks, have exposed the vulnerabilities represented by those
imbalances for growth, employment, public finances and financial
stability," the Commission said of Spain.
Unemployment in Spain is likely to reach 27 percent this
year as a second full year of recession bites. The economic
contraction could extend into 2014, the Commission said.
Reforms aimed to improve public finances, create jobs and
increase competitiveness are underway, but are not yet complete
or have not yet started to bear fruit, the Commission said.
Slovenia also faces substantial risks to the stability of
its financial sector because of corporate indebtedness and
deleveraging and the sector's links with public finances.
A relatively large bad loan portfolio is threatening the
stability of Slovenia's banks and has raised investor concerns
that it may be the next candidate for emergency euro zone loans.
"Urgent policy action is needed to halt the rapid build-up
of these imbalances and to manage their unwinding," the
It suggested Slovenia should recapitalise and privatise
banks and sell-off state-owned firms to draw in foreign
investment and restrain wages to make exports more attractive.
Both countries must tell the Commission before the end of
April how they want to address the problems and the EU executive
will issue recommendations for them at the end of May.