EU’s Barroso, Rehn signal shift in austerity policies

Barroso think tank EURACTIV.JPG

France and Spain fell short of their budget deficit goals last year and debt levels swelled across the eurozone but the pressure may be easing on Paris and Madrid as the European Commission signals an end to sharp spending cuts.

Outlining the state of Europe's accounts in 2012, the EU's statistics office Eurostat said on Monday (22 April) that France posted a deficit of 4.8% of economic output, higher than its 4.5% target. Spain's shortfall was the largest in the EU.

With budget cuts blamed for a second straight year of recession, the EU's top economics official Olli Rehn indicated over the weekend that more flexibility on tough economic targets was needed.

His boss, European Commission President José Manuel Barroso, said on Monday that austerity had reached its natural limits of popular support.

"While I think this policy is fundamentally right, I think it has reached its limits," he told the Brussels Think Tank Dialogue. "A policy to be successful not only has to be properly designed, it has to have the minimum of political and social support," Barroso told the conference, supported by EURACTIV as media partner.

Budget cuts have been at the centre of the eurozone's strategy to overcome a three-year public debt crisis but they are also blamed for a damaging cycle where governments cut back, companies lay off staff, Europeans buy less and young people have little hope of finding a job.

Crippling levels of unemployment and outbreaks of violence in southern Europe are now forcing a rethink, with the focus shifting to economic growth strategies.

Despite cuts and tax increases, Spain's budget shortfall was 7.1%, excluding bank recapitalisation, higher than the government's 6.98% official year-end reading and well above Madrid's original target of 6.3%.

Adding in the cost of recapitalising Spain's banks and a €40 billion bank bailout from the eurozone, Spain's deficit was nearly 11% in 2012, higher than the European Commission's forecast of 10.2%, and an increase from the 9.4% deficit of 2011.

That was higher than Greece, and the highest in the EU.

The eurozone's combined sovereign debt burden also hit a record of 90.6% of GDP in 2012, Eurostat said.

End of austerity?

The shift in austerity policies is backed by an improving picture overall, however. The 17-nation eurozone's combined fiscal deficit was 3.7% of gross domestic product, compared with 4.2% in 2011and 6.5 % in 2010.

Partly as a result, both Spain and France are expected to get more time to reach EU-mandated targets of 3%.

"We need to combine the indispensable correction in public finances, huge deficits, huge public debt … with proper measures for growth," Barroso said in a speech in Brussels just before Eurostat released its data.

EU leaders are desperate for economic growth, and the Commission will decide on May 29 whether to recommend to EU finance ministers to give Paris and Madrid until 2015 to cut their fiscal gap to 3% of GDP, today targeted for 2014.

It is not yet clear just how big a policy shift EU policymakers are planning.

Rehn, the EU's economic and monetary affairs commissioner, told Reuters in Washington on Thursday (18 April) that financial leaders from the group of 20 economies calling for less austerity were "preaching to the converted."

Rehn is looking increasingly at countries' fiscal efforts in structural terms, which means removing the effects of the business cycle and one-off measures on the budget.

But Germany and the European Central Bank want to see the eurozone put its finances in order after a decade of borrowing when countries' debt and deficit levels rose dramatically.

In addition, the EU's Fiscal Compact treaty signed by all EU countries, except Britain and the Czech Republic, in March 2012 requires governments to keep the budget in balance or surplus with a structural deficit no higher than 0.5% of GDP.

"I can't see there's been a big change and that austerity is off the table," said Jürgen Michels, an economist at Citigroup. "Most countries will have to come out with additional, substantial fiscal measures in order to meet their new targets."

Stagnant eurozone economies and growing unemployment rates across the EU have turned economic growth into a paramount need for Europe.

Under pressure from Germany, EU leaders have so far focussed their efforts on getting their accounts in order, committing to Draconian austerity plans and signing new treaties and adjustment plans mostly decided in Berlin.

At a June 2012 summit, EU heads of state agreed a "European Growth Pact" worth €120 billion, stressing the importance of restoring economic growth in Europe.

But doubts have been raised about how fresh the money will really be as at least half of the sums will be recycled from existing regional policy funds.

>> Read: Question marks over €120 billion EU 'growth pact'

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