Rehn Says Austerity Policy Not to Blame on Slow EU Growth

European Union Economic and Monetary Affairs Commissioner Olli Rehn said austerity policies shouldn’t be blamed for slow growth in the euro area and the long wait for economic recovery to turn into jobs.

The EU’s budget rules and “stability culture” are not standing in the way of long-term growth, Rehn said in a letter today to EU finance ministers, the European Central Bank and the International Monetary Fund. Studies on the harmful effects of budget cuts on the economy, through so-called fiscal multipliers, don’t always link to what’s happening in Greece and other crisis-stricken nations, he said.

“Growth in the euro area is likely to turn positive only gradually in the second half of 2013, and there will inevitably be a lag before a strengthening of economic activity has an impact on job creation,” Rehn said in the letter published in Brussels.

Rehn’s letter responded to findings by IMF Chief Economist Olivier Blanchard that budget cuts caused a deeper-than-expected reduction in European growth, reflecting the fund’s milder fiscal policy prescription in recent months for countries such as Greece and Portugal. The IMF is part of the so-called troika of euro-area creditors, along with the commission and the ECB.

In his letter, Rehn said that confidence effects in financial markets “are becoming clearly visible.” The program in Greece, the nation that sparked the debt crisis in late 2009, is now “decisively back on track” and Greek authorities have accomplished “a great amount” in terms of reforms that could boost growth and encourage investor fears to lift, he said. Greece now must follow through on its promises to reap the benefits of this improved sentiment, he said.

IMF Papers

In working papers published last month and in October, Blanchard and colleague Daniel Leigh said that fiscal multipliers, which gauge the impact of budget consolidation on growth, were “substantially higher” than anticipated by analysts during the debt crisis.

While the authors said their findings should not be seen as arguing for specific country policies, recent IMF advice in Europe suggests they have been influential. Greece and Portugal received more time to meet fiscal targets under international bailout packages and the fund says Latvia’s spending cuts have gone too far.

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