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19 September 2013

WSJ: Austerity seen easing with change to EU budget policy

European Commission finance officials have tentatively reached an agreement to adjust the way the 'structural deficit' of eurozone countries is calculated. This could allow for an easing of austerity, since more of the deficit could be seen as 'cyclical'.

The change involves an obscure calculation that the European Commission, which polices EU budget rules, uses to calculate a country's "structural deficit", which is the actual budget deficit, adjusted for the strength of the economy. It has become a key metric that the Commission uses to determine how far a country has to go with austerity to meet its targets. A new treaty signed by most EU governments calls for structural deficits in most cases to remain under 0.5 per cent of a country's gross domestic product.

The change, tentatively approved Tuesday in Brussels, would apply to the next calculations made by the Commission in its autumn economic forecasts. It must still be formally approved by senior finance ministry officials at a meeting next week, though approval is likely, said Igor Lebrun, a Belgian official who chairs the group that drafted the changes.

Europe's current method for calculating the structural deficit has determined that much of the budget deficits seen in the bloc's weakest economies are structural, or built-in, not cyclical. That means they will persist even after the economy has returned to full strength. So austerity measures—spending cuts or higher taxes—are required.

The calculation is based on the Commission's finding that even some of the bloc's weakest economies are operating relatively close to full capacity, which many of those countries dispute. They argue that the difference between the current state of the economy and full capacity is significantly larger than the Commission's estimates. For example, the latest Commission estimate is that the Spanish gap is just 4.6 per cent of gross domestic product, despite nearly 27 per cent of Spain's labour force being officially unemployed.

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© Wall Street Journal

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