Investor Alert

May 13, 2015, 2:04 p.m. EDT

EU Raps France and Italy for Economic Shortcomings

By Matthew Dalton

BRUSSELS—European authorities on Wednesday criticized France and Italy for economic shortcomings and said their policies deserve heightened scrutiny in the coming year.

The European Commission, which is the European Union’s executive arm, also said it may open budget-enforcement proceedings against once-solid Finland, which has seen its public finances deteriorate because of gloomy economic conditions .

The moves are part of the commission’s annual recommendations to the 28 EU member states. The recommendations are supposed to help prevent economic problems from accumulating to the point of crisis.

The commission cited France , Italy, Portugal, Bulgaria and Croatia for having economic imbalances—such as high debt levels, rigid labor markets, or falling export market shares—that are considered excessive.

The commission has the power to fine countries for having excessive imbalances, but on Wednesday it didn’t propose activating enforcement proceedings against those five nations.

“Today we ask member states to ensure that the ongoing economic recovery is more than a seasonal phenomenon,” said Pierre Moscovici , the EU’s economics commissioner.

This year, Jean-Claude Juncker , the new president of the European Commission, has pledged to cut down on the number of recommendations to the member states and sharpen their focus. EU officials have for several years complained member ignore many policy prescriptions coming out of Brussels.

Among recommendations, the commission said Paris should cut taxes on corporations and “production,” and make up the difference by raising more revenue through taxes on consumption. A change in the tax burden should help boost anemic investment spending by French companies, the commission said.

France’s systems for setting wages need overhauls to ensure pay doesn’t rise faster than productivity, according to the recommendations. Restrictions on regulated professions, particularly in the health sector, should be removed, the commission said. Unemployment benefits should be cut to increase the incentive to work, while labor laws should be changed to allow more open-ended employee contracts.

The commission said Italy should pass laws that would modernize public administration and improve efficiency of its justice system. New laws are needed to strengthen corporate governance of Italian banks and reduce the prevalence of loans that are months overdue in the financial system, the commission said.

Finland’s budget “strongly indicates” the Nordic country is moving away from budget goals agreed with the EU, according to the commission. The commission’s latest economic forecasts put Finland’s budget deficit at 3.3% of gross domestic product this year and 3.2% of GDP next. EU rules call for member states to keep their deficits under 3% of GDP.

A combination of problems has buffeted the Finnish economy in recent years: the decline of Nokia Corp., its one-time national champion; deteriorating relations with Russia, one of its biggest trading partners, over the conflict in Ukraine; and weakness in other important industries, such as pulp and paper. The commission will decide in the coming weeks whether to place Helsinki in the budgetary penalty box.

The commission said Germany’s large current-account surplus, expected to reach 7.9% of GDP this year, created an imbalance in the German economy, but didn’t say the imbalance is excessive. The large size of the surplus has led to repeated criticism from economists and the commission that the German government, companies and consumers aren’t spending enough to boost the eurozone economy.

The commission said the German government should increase spending on investment projects education and research, to boost the domestic economy.

Write to Matthew Dalton at Matthew.Dalton@wsj.com

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