EU Affirms Debt-Cutting Strategy in Face of ‘Fragile’ Outlook

The European Union will tell its counterparts in the Group of 20 nations that a shaky economic recovery requires renewed commitment to budget cuts and other structural reforms.

“The situation remains fragile” in the euro area, the EU said in a planning document prepared for this week’s G-20 meeting in Washington and obtained by Bloomberg News. The document affirms the EU’s “fiscal consolidation strategy” and calls on other countries to speed up similar efforts.

One of the main threats facing the world economy is “the lack of credible medium-term fiscal consolidation plans in the U.S. and Japan,” according to the EU document. It also sees risks stemming from a renewed slowdown in emerging-market nations, political tensions that could boost oil prices and the euro-area’s three-year-old sovereign debt crisis.

The currency bloc is now in its second year of recession, battered by a debt crisis that so far has forced five of its 17 members to take bailouts. U.S. Treasury Secretary Jacob J. Lew has urged Europe to focus more on boosting demand to balance out its emphasis on fiscal discipline.

Mild recovery should take root in the euro region toward the middle of this year, strengthening through the end of 2013 and into 2014, according to the EU planning document. It says the EU’s experience shows “the importance of a more ambitious debt anchor,” such as a target ratio of debt to economic output. This should be coupled with a “consolidation path that is carefully calibrated to sustain the recovery.”

Japanese Dependence

On Japan, the EU noted its risks becoming too dependent on fiscal and monetary stimulus if current policies continue and the country doesn’t make progress on structural reforms.

New Bank of Japan Governor Haruhiko Kuroda unveiled unprecedented stimulus after his first policy meeting this month, a move that weakened the yen against the dollar. The U.S. Treasury Department said in a report on exchange rates on April 12 that it will press Japan to refrain from competitive devaluation while stopping short of accusing it of manipulating the yen.

EU emphasis has been on reducing public fiscal deficits while “overlooking” overstretched borrowing in the private sector, the Brussels-based Bruegel research group said in a presentation to finance ministers last week. This means that the U.S. crisis recovery effort has outpaced Europe because of cutbacks in household and corporate debt, even though U.S. public debt has seen bigger increases.

U.S. Ahead

“The U.S. is therefore ahead of Europe in the aggregate deleveraging process,” Bruegel’s Zsolt Darvas, Jean Pisani-Ferry and Guntram Wolff said. The report said the EU’s “unsatisfactory recovery from the crisis” and weak economic outlook are major challenges that require bold action.

The EU will encourage the U.S. to tackle entitlement reform and find new ways to increase government revenue, according to the document.

The EU document said China should “move rapidly toward a market-determined exchange rate system in the context of larger capital account openness.” The U.S. refrained from branding China a currency manipulator in its report, while pressing the country to adopt greater exchange-rate flexibility.

Before it's here, it's on the Bloomberg Terminal.