05 March 2013

Bloomberg: EU opens way for easier budgets after austerity backlash

Italy's deadlocked election, France's refusal to make deeper budget cuts and protests against the shrinking of the welfare state across southern Europe escalated the rebellion against the German-led prescription for fighting the debt crisis.

European finance ministers opened the way for looser budget policies after a backlash against austerity thrust Italy into political limbo and shattered months of relative stability in European markets. Economic strains “may also justify in a certain number of cases reviewing deadlines for the correction of excessive deficits”, European Union Economic and Monetary Commissioner Olli Rehn said.

"We do not want to add austerity to recession”, Moscovici said. “If our rules are intelligent, they are also flexible. We have to find the right rhythm and the right balance without weakening the little growth left.” France is counting on estimates that it has made sufficient reductions in the “structural” deficit -- a figure that factors out the effect of the economic cycle -- to escape a European order to cut more.

Germany’s Merkel indicated that she is sensitive to criticisms that budget-cutting has been overdone. “We’ve done quite a bit to consolidate budgets, but we always have this discussion about growth, and don’t quite have the answers for where the growth should come from”, Merkel said. Messages from the Brussels-based commission have catered to two audiences, with pro-austerity rhetoric aimed at northern Europe contrasting with policy decisions to ease the strains on the unemployment-plagued south.

With the northern public in mind, Rehn said it is wrong to characterise the more flexible approach as “leniency". He said the budget rulebook “is not stupid, but it focuses on the structural sustainability of public finances".

The commission last year recommended -- and governments including Germany endorsed -- extensions of deficit reduction deadlines for Portugal, Greece and Spain. It is considering giving France extra time to get its deficit down to 3 per cent of gross domestic product, the euro area limit. Portugal and Spain are also clamouring for additional relief.

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