Euro Zone Crisis

EU eases pace of austerity to support ailing economies

PUBLISHED : Thursday, 30 May, 2013, 12:06am
UPDATED : Thursday, 30 May, 2013, 2:19am


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The European Union softened its demands for austerity on Wednesday when it gave France, Spain and four other member states more time to bring their deficit levels under control so that they can support their ailing economies.

The EU Commission, the 27-nation bloc’s executive arm, said the countries must instead overhaul their labour markets and implement fundamental reforms to make their economies more competitive.

Issuing a series of country-specific policy recommendations in Brussels, Commission President Jose Manuel Barroso said that the pace of reform needed to be stepped up across the EU to kick-start growth and fight record unemployment.

“There is no room for complacency,” he insisted.

After Europe’s crisis over too much debt broke in late 2009, the region’s governments slashed spending and raised taxes as a way of controlling their deficits – the level of government debt as a proportion of the country’s economic output.

But austerity has also inflicted severe economic pain.

Slashing spending and raising taxes have proved to be less effective at reducing deficits than initially thought. As economies shrink, so do their tax revenues, making it harder to close those budget gaps.

Besides France and Spain, the commission is also granting the Netherlands, Poland, Portugal and Slovenia more time to bring their deficits below the EU ceiling of 3 per cent of annual economic output. That means they will be allowed to stretch out spending cuts over a longer time as they try to fight record unemployment and recession.

The Netherlands and Portugal are now granted one additional year, whereas France, Spain, Poland and Slovenia are granted two additional years each.

Europe is stuck in a recession – which has led to an increasingly bitter debate over the merits of austerity as a way to solve the region’s problems economic problems.

With rising unemployment, there is a growing consensus that governments must shift their policies toward fostering growth to end the downward economic spiral, even in countries like Germany that have long insisted vehemently on rigorous fiscal policies.

The new measures, however, are not a sign that Europe has abandoned its message of austerity and strict budgetary discipline altogether. Moreover, bailed-out Greece, Ireland, Portugal and Cyprus still have harsh deficit targets they have to meet to continue getting bailout loans.

Barroso rejected suggestions that the Commission bowed to political pressure and switched focus away from austerity.

Singling out France, the 17-nation euro zone’s second-largest economy, as an example of how the EU is still keeping an eye on its members’ economies, Barroso said that “this extra time should be used wisely to address France’s failing competitiveness,” he added.

In its recommendations, the Commission urges France to cut red tape, improve conditions for small and medium sized companies and strengthen competition in the country’s service and energy sector.

“French companies’ market shares have experienced worrying erosion in the last decade, in fact beyond the last decade, we can say the last 20 years,” Barroso stressed.

Spain, the euro zone’s fourth-largest economy, with an unemployment rate of 27 per cent, now has until 2016 to bring its deficit under control. It is set to drop from 6.5 per cent of GDP this year to 2.8 per cent then.

To achieve this significant amount, the Commission says Madrid must scrutinise spending programmes, push ahead with labour market reform, revise the tax system, reduce costs in the health sector and push through pending bank recapitalisations.

The commission’s recommendations will become legally binding and shape the countries’ fiscal policies once approved by the EU’s leaders, who will discuss them at their summit next month.

Some countries were also dropped off the Commission’s list of nations whose budgets are under increased surveillance because of an excessive deficit. They include Italy, Latvia, Hungary, Lithuania and Romania.

The most important of these decisions was on Italy, the euro zone’s third-largest economy, where the Commission expects this year’s deficit to come in at 2.9 per cent and then 1.8 per cent next year. However, the experts in Brussels gave the new government in Rome a long list of measures, including labour market reforms and an overhaul of the tax system, to be pushed through.

The EU’s top economic official, Olli Rehn, insisted Italy still had little leeway to go on a spending binge or lower taxes. “Italy has a very low safety margin to keep the budget under the limit,” he said.

Governments across the 17-nation euro zone last year slashed their budget deficits by about 1.5 per cent of their combined annual GDP in structural terms, which takes into account the sluggish economy. That pace is set to be halved this year, the Commission said in its spring forecast earlier this month.

Since the debt crisis erupted, EU nations have agreed to give the bloc’s executive arm more powers in scrutinising national budgets, complete with the ability to punish or issue binding policy recommendations for countries running excessive deficits.

In practice, however, the Commission wields considerable power in its dealings with smaller member states, but big nations like France are hard to bring into line.

Though even with smaller countries, imposing fines in economically difficult times has proven difficult. This was the case with Belgium, host to most EU institutions, which Wednesday was lucky to escape punishment after missing its 2010 and 2011 deficit targets – a period when the country was without an government for 541 days.

“It went into injury time but Belgium used it effectively and scored during this injury time,” said Rehn. “It would neither be fair nor legally sound to apply it retroactively to those years.”

A leading international body warned on Wednesday that the recession in Europe risks hurting the world’s economic recovery as whole. The Organisation for Economic Co-operation and Development said the euro zone’s economy is now expected to shrink by 0.6 per cent this year, against a predicted drop of 0.1 per cent in its latest outlook six months ago.

The EU Commission this month forecast the euro zone’s economy would shrink by 0.4 this year. It estimated the wider EU – which includes the ten nations such as Britain that don’t use the euro currency – would suffer a 0.1 per cent contraction.