Barroso says political instability is biggest threat to EU recovery

Jose Manuel Barroso warned that political instability was now the biggest threat to Europe's fitful recovery from the three-year-old eurozone crisis, arguing that governments are still at risk of punishment from the financial markets if they veer from economic reforms recommended by Brussels.

In his annual state of the EU address, the European Commission president gave a vigorous defence of Brussels' response to the crisis, arguing that policies it advocated are now finally bearing fruit in the eurozone's hardest-hit countries, from Portugal to Greece.

"The facts tell us that our efforts have started to convince," he said. "Overall [bond] spreads are coming down. The most vulnerable countries are paying less to borrow."

But he warned that progress was being put in peril by leaders attempting to return to "business as usual", saying the "biggest downside risk" to current efforts is political complacency.

"We will not come back to the old normal," Mr Barroso said. "We have seen that anything that casts doubt on governments' commitment to reform is instantly punished."

Mr Barroso did not single out any country during his half-hour speech. But his warnings come as the Italian government teeters on the verge of collapse and its coalition government is gradually rolling back some of the tax reforms imposed by Mario Monti, the former prime minister.

Similarly, both Portugal and Greece have been rocked in recent months by defections from governing coalitions by parliamentarians objecting to continued austerity measures.

As he launched his final year at the helm of the EU's executive branch, Mr Barroso warned that those who backed European integration risked being swamped in next year's European parliamentary elections if they continued to engage in blame games, pointing fingers at either Brussels or other EU countries.

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Although the address contained the usual list of legislative proposals - including an "urgent" call to complete the eurozone's banking union before next May's elections - it also included one of the most comprehensive defences to date of the EU's response to the eurozone crisis.

Mr Barroso said such a defence was essential or political debate of the coming year would be dominated by eurosceptics and EU opponents.

"I know some people out there will say Europe is to blame for the crisis and the hardship," he said. "But we can remind people that Europe was not at the origin of this crisis. It resulted from mismanagement in the past and irresponsible behaviour in financial markets."

<>He argued that without actions taken at the EU - safeguarding the financial sector, co-ordinating economic reforms, pooling €700bn in eurozone bailout funds - Europe's common market would probably have disintegrated and the fate of "the most vulnerable" would have been even worse.

"What matters now is what we make of this progress," he said. "Do we talk it up, or talk it down? Do we draw confidence from it to pursue what we've started, or do we belittle the results of our efforts?"

He also acknowledged that Brussels had made mistakes, saying the EU occasionally attempted to legislate in areas where national governments should have been left in charge. Both the UK and, to a lesser extent, the Netherlands are re-examining what powers Brussels should keep and which may need to be surrendered back to national capitals.

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