EU to Show Flexibility on Budget-Deficit Rules, Rehn Says

European Union Economic and Monetary Affairs Commissioner Olli Rehn indicated the EU would show flexibility in enforcing the bloc’s deficit rules as nations across the region struggle to spur growth as they cut debt.

With economies from Spain to the Netherlands sliding into recession, elections tomorrow in France and Greece may highlight concerns that German-led budget cuts aimed at taming the debt crisis could falter. Francois Hollande, the frontrunner in France’s presidential race, has called for more focus on growth in the region’s fiscal pact, while polls in Greece show many voters favor anti-bailout groups promising an end to austerity.

“The pact entails considerable scope for judgment, based on economic analysis and its legal provisions, when it comes to its concrete application,” Rehn said today at an event sponsored by the Institute for European Studies in Brussels. The pact ’’implies differentiation among the member states according to their fiscal space and macroeconomic conditions.’’

Spain, with Europe’s highest jobless rate, and the Netherlands are among EU countries laboring to meet their deficit commitments under the pact amid a slump across the region. The euro area’s manufacturing industry shrank the most in almost three years in April and unemployment is at the highest since the euro was introduced, data showed this week.

Worsening Prospects

The worsening prospects for the economy pushed the euro to its biggest weekly drop against the dollar in almost a month. The European currency fell 1.3 percent to $1.3084 yesterday in New York, down from $1.3255 a week earlier.

European Central Bank President Mario Draghi said two days ago that the economic outlook has become “more uncertain” as the ECB kept its benchmark interest rate at a record low of 1 percent. Draghi is calling for a “growth compact” to go alongside the fiscal accord agreed to by the 17 euro nations.

Hollande, the Socialist challenger who is leading French President Nicolas Sarkozy in opinion polls, has said he will seek to add growth and investment measures to the fiscal treaty. Hollande also is calling for the European Investment Bank to be given a bigger role in spurring public spending.

Rehn, who has urged a capital boost for the EIB, said this and other proposals to spur investment could be combined in an “investment pact,” which would also include so-called project bonds to fund infrastructure spending, supporting green technologies and using the EU’s budget to co-finance efforts.

’’We need to enhance public investment and use it in a smart way to unlock further private investment,’’ Rehn said in the text of his speech. “While the single market remains our main growth engine, this kind of investment pact could provide necessary additional fuel for the engine.”

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