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24 April 2012

WSJ: Europe struggles with painful deficit cures


A pledge by EU governments to bring their budget deficits in line with EU rules by the end of 2013 is causing economic pain and political discontent across Europe, causing officials to begin a sensitive discussion on how the goal could be changed to avoid driving Europe further into turmoil.

The target, set in 2009, is still seen as an important signal that the budget rules won't be flouted as they were in the past. But meeting the 2013 goal, which for most countries was a deficit of 3 per cent of gross domestic product, will entail more spending cuts or tax increases by governments across the EU.

The political consequences of austerity are becoming apparent. The Dutch government, one of the EU's main enforcers of fiscal orthodoxy, collapsed this week over disagreements about spending cuts and taxes that will be needed to bring the deficit under 3 per cent of GDP next year. François Hollande, the French Socialist candidate who is favoured to defeat incumbent President, Nicolas Sarkozy, in next month's election, has made a pledge to soften Europe's austerity policies -a central plank of his campaign.

Even the relatively new centre-right government of Spanish Prime Minister, Mariano Rajoy, which already got into a fight with EU bureaucrats in Brussels over its plans to soften scheduled budget cuts, faced unexpected weakness in regional elections last month, a sign the Spanish public is becoming increasingly weary of recession.

The gravity of the situation confronting a number of governments is starting to change the debate. Spain will be forced to cut its deficit by 5.5 percentage points over the next two years, a Herculean task given that the unemployment rate is around 23 per cent and the economy is likely in recession.

The Netherlands is facing a deficit of 4.6 per cent of GDP next year without further cuts, the government's economic analysis agency said last month. These cuts will be coming in the face of strong headwinds: the economy is expected to contract this year.

One option floated by some officials involved in the debate would place the actual budget deficit on an "equal footing" with the "structural" deficit, which is what the deficit would be if the economy were operating at full capacity.

Full article



© Wall Street Journal


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