Merkel Rides Pro-Growth Bandwagon as EU Loosens Budget Shackles

Photographer: John Thys/AFP via Getty Images

German Chancellor Angela Merkel arrives for a round table meeting at the European Union Headquarters in Brussels, on the first day of a two-day European Union summit. Close

German Chancellor Angela Merkel arrives for a round table meeting at the European Union... Read More

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Photographer: John Thys/AFP via Getty Images

German Chancellor Angela Merkel arrives for a round table meeting at the European Union Headquarters in Brussels, on the first day of a two-day European Union summit.

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

Merkel went into a European Union summit today urging a stepped-up fight against youth unemployment, now over 50 percent in Greece and Spain, and skipped the appeal to fiscal discipline that has been her standard message throughout the debt crisis.

“We will have one focus above all: the fight against youth unemployment,” Merkel told reporters before the 27 national leaders gathered in Brussels. “We passed a growth pact last summer and what matters now is putting life into this growth pact. The money is there, we have to get the money to the people so young people in Europe get jobs.”

The euro zone’s continued 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.

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. Merkel is running for a third term in September.

Bond Yields

European leaders are cloaking the easing up on the budgetary reins in language designed to reassure investors who have driven bond yields lower since mid-2012. Balanced budgets remain the goal and large-scale spending programs or bond issues aren’t on the agenda.

A milestone toward overcoming the debt crisis came yesterday, 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.

With growth and jobs the dominant theme, officials in Brussels and national capitals said that an aid package for the next problem country, Cyprus, doesn’t even need to be discussed at the summit. It will be dealt with tomorrow at a separate meeting of euro-area finance ministers that starts about 5 p.m.

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

Economic Contraction

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 26.9 percent in Spain.

Leaders will endorse the commission’s plans to make “structural” assessments of national budgets, according to a draft statement, using code for granting countries such as France, Spain and Portugal extra time to bring down deficits.

“We have to restore sound and sustainable public finances, via continued differentiated fiscal consolidation and focused on structural efforts,” EU President Herman Van Rompuy said at a pre-summit briefing.

In a nod to Italy, the draft 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.

Budget Pressure

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.

“The simple allegation that the commission pursues austerity inflexibly does not hold,” Marco Buti and Nicolas Carnot of the commission’s economics department said in a policy paper yesterday. “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.

Extra Time

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 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.

“If there is too much austerity, there will be too much unemployment,” French President Francois Hollande said. “Flexibility is necessary if we want to make growth the priority.”

To contact the reporters on this story: James G. Neuger in Brussels at jneuger@bloomberg.net; Fred Pals in Brussels at fpals@bloomberg.net

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

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