The European Commission unveiled its much-anticipated economic recommendations for member states yesterday, warning of the continuing challenges facing the economy, amid signs that its policy of fiscal consolidation may be easing.

France, Spain, Poland and Slovenia were given two extra years to bring their budget deficits in line with the EU’s budget deficit ceiling of 3 per cent of gross domestic product, while Portugal and the Netherlands were granted an extra year.

The commission also confirmed Italy had exited the “excessive deficit procedure”, the monitoring system that kicks in when a country is found to have breached budget deficit rules.

Shrinking economy
However, the commission warned the euro zone economy would shrink by 0.4 per cent this year, highlighting as areas of particular concern unemployment, uncompetitiveness and "pockets of vulnerability" in the banking sector. Commission president José Manuel Barroso said that while fiscal consolidation should be "ongoing" and at a pace that reflects the situation in each individual country, member states should intensify efforts on structural reforms. "Because of good progress made, we now have the space to slow down the pace of consolidation," he said.

His comments were echoed by European commissioner Olli Rehn, who noted the pace of consolidation in EU countries had halved compared to last year. Eleven EU countries breached the deficit limit of 3 per cent of GDP last year, according to the European Commission, although five – Hungary, Italy, Latvia, Lithuania and Romania – are to exit the excessive deficit procedure this year .

The extension of Spain’s and France’s deadline had been expected. French companies had lost competitiveness over the last two decades, Mr Barroso said, while labour costs needed to be reduced through lower social security contributions.

Italy's woes
While Italy successfully exited the procedure, the commission underlined the challenges: "Italy's capacity to withstand the impact of the crisis is hampered by long-standing structural weaknesses." The recommendations came as the OECD forecast that the euro zone's third-biggest economy will contract by 1.8 per cent this year. Germany also needed to align wages with productivity by increasing wages, the commission said.

The European Commission’s recommendations were based in part on submissions by each member state. No specific recommendations were given for the bailout countries, including Ireland.

* This article was amended on May 30th, 2012 for clarity