EU to ease pace of austerity to help economy

Wednesday, May 29th, 2013 | Finance News

BERLIN (AP) — The European Union will ease its focus on austerity as a way to solve its three-year debt crisis when it unveils country-specific economic policy recommendations Wednesday.

The EU Commission, the 27-nation bloc's executive arm that oversees budget rules, is expected to grant France, Spain and others more time to slash their deficits. That means governments will be allowed to stretch out spending cuts over a longer time so as not to choke off growth as they try to fight record unemployment and recession.

EU officials have indicated the recommendations will call for continuing fiscal consolidation, but at a slower pace, instead stressing the need to implement sweeping structural reforms, such as overhauling labor markets to make economies more competitive.

Analysts say the EU's insistence on forcing member states to aggressively slash spending and raise taxes has worsened the recession in many countries, especially in those like Greece or Portugal that have been bailed out by their European peers, leading to more unemployment and growing resentment toward EU policies.

Instead of keeping the spending taps on — as the U.S. has largely done — the region concentrated on austerity even though companies and consumers weren't able to plug the gap left by the retrenching state.

Wednesday's recommendations will be presented in Brussels by EU Commission President Jose Manuel Barroso and the bloc's top economic official, Olli Rehn. They 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.

Governments across the 17-nation eurozone last year slashed their budget deficits by about 1.5 percent of their combined annual GDP in structural terms, which takes into account the sluggish economy. That pace is set to be halved in 2013, the Commission said in its spring forecast earlier this month.

The leaders of Italy, Spain, Portugal, Greece and other countries hit hard by the euro's three-year debt crisis have long pleaded for more leniency, but Germany and other creditor nations insisted on meeting the agreed deficit reduction targets.

The protracted recession in the eurozone has over the past few months led to a debate over the merits and faults of budget austerity among policymakers, economists and in the media. It has resulted in a growing consensus that European governments must shift their budget policies more toward fostering growth to end the downward economic spiral.

The reasoning is that growth will provide governments with the extra revenue they need to pay down debt. The recession does the opposite, undercutting the austerity measures' effectiveness.

EU officials have indicated that France and Spain, the eurozone's second- and fourth-largest economies, will be granted two extra years to bring their budget deficits below the EU ceiling of 3 percent of annual economic output, provided they don't fall behind on their targets for structural reforms.

France's deficit last year stood at 4.8 percent of GDP and the Commission expects it to hit 3.9 percent this year. Spain's deficit, excluding bank recapitalization measures, is expected to narrow from 7 percent in 2012 to 6.5 percent.

In its spring forecast this month, the EU Commission also said the eurozone's recession will be deeper than expected and drag on longer. It said GDP is forecast to shrink by 0.4 percent this year, 0.1 percentage points worse than in its previous forecast in February. It contracted by 0.6 percent in 2012.

The economy of the wider European Union, including the ten nations such as Britain that don't use the euro currency, is expected to shrink by 0.1, against a forecast of 0.1 percent growth made in February.

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