EU Eases Budget Rigor as Recession Bites, Joblessness Up

Photographer: Eric Lalmand/AFP/Getty Images

Union delegations from several EU countries participate in a demonstration against budget cuts in Brussels on March 14, 2013. Close

Union delegations from several EU countries participate in a demonstration against... Read More

Close
Open
Photographer: Eric Lalmand/AFP/Getty Images

Union delegations from several EU countries participate in a demonstration against budget cuts in Brussels on March 14, 2013.

European governments loosened the shackles on national budgets as the euro-area recession deepens and unemployment climbs, with pro-growth appeals coming even from German Chancellor Angela Merkel, the leader most closely associated with austerity.

European Union leaders endorsed “structural” budgetary assessments, using code for granting countries such as France, Spain and Portugal extra time to bring down deficits. Still, balanced budgets remained the goal and there was no talk of large-scale spending programs or bond issues.

“If there is too much austerity, there will be too much unemployment,” French President Francois Hollande said at an EU summit in Brussels late yesterday. “Flexibility is necessary if we want to make growth the priority.”

The euro zone’s economic slump has shoved aside the financial crisis as the bloc’s biggest headache, leading the EU to push back deficit-reduction deadlines and making it perilous for politicians to wrap themselves in the flag of austerity.

European leaders are cloaking the easing up on the fiscal reins in language designed to reassure investors who have driven bond yields lower since mid-2012. They labelled the policy “differentiated growth-friendly fiscal consolidation,” with deficit targets set on a country-by-country basis.

‘Risk to Growth’

“I’m in favor of consolidation, but the budgetary adjustment measures we take shouldn’t pose a risk to growth,” Luxembourg Prime Minister Jean-Claude Juncker said. “There should be a certain intellectual and practical flexibility.”

A milestone toward overcoming the debt crisis came on March 13, when Ireland sold 10-year bonds for the first time since its bailout in 2010. The relative calm in markets was barely disturbed by the election in Italy, which still hasn’t produced a government.

The 10-year bonds of both Italy and Ireland advanced today, and German bunds were set for a weekly gain. Italian 10-year yields fell three basis points to 4.61 percent, paring this week’s increase to two basis points.

With growth the dominant theme, European officials sought to keep an aid package for the next problem country, Cyprus, off the agenda of the summit and of a smaller meeting afterward of heads of the 17 euro countries. Cyprus will be dealt with at a separate meeting of euro-area finance ministers that starts at 5:00 p.m. today.

‘Margins for Flexibility’

Thousands of protesters against budget cuts and the perceived dictates of financial markets converged on the EU headquarters, carrying banners saying “European Austerity = Misery.” About 10,000 people gathered in a park close to the summit, Brussels police said.

Caretaker Italian Prime Minister Mario Monti found out that budget cutting can be a career-ender when he managed only 10 percent of the vote in an election last month. He arrived at his last EU summit calling for “margins for flexibility” on budgets.

In a nod to Italy, the summit statement said euro-area rules provide space for “productive public investment” by countries with deficits under the limit of 3 percent of gross domestic product. Italy was one of eight euro states to pass that test last year.

Merkel, running for a third term in September, came to Brussels determined to fight youth unemployment, now over 50 percent in Greece and Spain. The jobs priority eclipsed her routine message about eliminating deficits, something Germany managed to do last year.

Emergency Aid

“With the available money, we now have to find the best ways of giving younger people and also older people a chance,” Merkel said. She said “solid budgets” go hand-in-hand with underpinning growth and bringing down unemployment.

The 17-nation currency region will follow last year’s 0.6 percent contraction by shrinking 0.3 percent in 2013, the first back-to-back decline since the euro’s debut in 1999, the European Commission forecasts. It sees bloc-wide unemployment at 12.2 percent in 2013, with joblessness as high as 27 percent in Greece and Spain.

Pressure remains on France, Italy and the countries tapping emergency financial aid to make their economies more productive by reducing labor costs and deregulating professions. The commission, the Brussels-based enforcer of the budget rules, fended off attacks from southern Europe that it has been too strict and parried warnings from northern Europe that it is becoming too lax.

Berlin Leadership

“The simple allegation that the commission pursues austerity inflexibly does not hold,” Marco Buti and Nicolas Carnot of the commission’s economics department said March 13 in a policy paper. “Nor obviously does the opposite accusation that the framework is being weakened.”

German officials have backed the commission’s approach, indicating that the Berlin leadership is sensitive to criticisms that budget cutting has gone too far. A “pro-growth” bias may even play to Merkel’s advantage, enabling her to siphon votes away from the opposition Social Democrats -- and potentially forge a coalition with them if dictated by the election outcome in September.

Greece, Portugal and Spain were granted extra deficit- reduction time last year with the permission of Germany and other governments. More extensions may come “in the near future,” the two commission officials wrote. Portugal is set for another respite, the commission’s president, Jose Barroso, told Expresso newspaper last week.

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.

All 27 EU leaders hold a final session from 10 a.m. to 12:30 p.m. today on foreign-policy issues led by Syria.

To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net; Gregory Viscusi in Brussels at gviscusi@bloomberg.net

To contact the editor responsible for this story: James Hertling at jhertling@bloomberg.net

Press spacebar to pause and continue. Press esc to stop.

Bloomberg reserves the right to remove comments but is under no obligation to do so, or to explain individual moderation decisions.

Please enable JavaScript to view the comments powered by Disqus.