Exit strategy for public finances

Lithuania and Malta granted reprieve on budget deficits; Hungary and Latvia on track to meet deadlines.

Twenty member countries are facing EU deadlines to get their budgets back in shape - deemed crucial to economic stability and growth as the EU claws back from recession. A review of the situation in Hungary, Latvia, Lithuania and Malta shows all four countries have taken adequate steps to narrow their deficits.

Hungary and Latvia are on track to meet their existing deadlines and are urged to pursue these efforts. But the commission asks EU finance ministers to give Malta and Lithuania each another year to return to fiscal discipline, until 2011 and 2012 respectively. Their economies contracted more than had been expected in July, when the existing deadlines were set.

European governments are struggling to rein in deficits after the worst downturn since World War II. The gaps widened as governments boosted spending to shore up their banking systems and revive their economies. With tax revenues falling sharply and more people on the dole, many had to borrow the money. Paying off this debt is already expensive, even though interest rates are low. Any rise in rates could put a brake on the recovery.

The EU's stability and growth pact - the agreement between member countries to coordinate national fiscal policies - requires current and potential eurozone members to keep their public finances sound, with budget deficits below 3% of GDP. When a country exceeds the limit, EU finance ministers issue recommendations for reducing the shortfall. Laggards could face penalties and tighter access to loans from the European Investment Bank.

In all, 20 member countries now exceed the 3% cap.

Hungary met its 2009 deficit target of 3.9% of GDP. It has until 2011 to bring its deficit below 3%. Latvia finished the year with a deficit projected at just under 10% of GDP, as recommended by the EU. The target for 2010 is 8.5%.

Lithuania's deficit ballooned to nearly 9.5% of gross domestic product last year, up from 3.2% in 2008. Malta ended 2008 with a deficit of 4.7% of GDP and is projecting that this will drop to 3.8% for 2009.