EU Rebuts Austerity-Obsessed Image, Defends Growth PlansRebecca Christie and Rainer Buergin
European officials sought to convince policy makers from the rest of the world that they’re not cutting budgets at the expense of stronger growth.
As the U.S. and others prodded the 27-nation bloc to play a bigger role in the global recovery, European Union participants in Washington this week offered a united front in defense of their push to rein in fiscal deficits and revamp their workforces.
There is a “misunderstanding” that the EU and the euro zone are “only fixated on austerity,” Dutch Finance Minister Jeroen Dijsselbloem told reporters yesterday at the World Bank and International Monetary Fund’s spring meetings. He said the EU will slow down the pace of debt-cutting efforts to account for economic weakness, giving crisis-stricken nations such as Portugal more time if necessary.
Five euro-area nations have so far sought bailouts during a financial crisis that has left 19 million workers without jobs and required trillions of euros in financial-sector assistance. The euro area’s response has focused on lowering national debts, even as forecasts project a second straight year of economic contraction.
The IMF lowered its global growth outlook and called for the European Central Bank to pursue an “aggressive monetary” policy. The fund projected a 0.3 percent euro-area contraction this year, accompanied by a world growth forecast of 3.3 percent that was lower than a prior estimate of 3.5 percent.
European stocks last week fell by the most in five months as economic data from the U.S. to Germany missed estimates, prompting a selloff of the shares of commodity producers. The Stoxx Europe 600 Index dropped 2.5 percent to 285.21 last week and has slid 2.9 percent so far in April, heading for the first monthly loss since May 2012.
The IMF’s policy-setting committee yesterday warned of an “uneven recovery” in which growth and job creation remain too weak.
“Despite some progress, we cannot unmistakably declare that the worst is behind us,” Brazilian Finance Minister Guido Mantega said in a statement yesterday, citing some countries in Europe showing “signs of weakness and inability to grow consistently.”
Other officials outside the continent urged their European colleagues to find an appropriate balance.
“It’s a question of how much and how quickly, and for some of them there’s no reason to rush into up-front, heavily loaded fiscal consolidation,” IMF Managing Director Christine Lagarde, a former French finance minister, told Bloomberg Television.
U.S. Treasury Secretary Jacob J. Lew, in a statement, said weak domestic demand has undercut the euro-area’s efforts to return to growth. He said it will be vital for export-oriented economies to step up to protect Europe from being crushed under its so-called austerity strategies.
“Stronger demand in Europe is critical to global growth,” Lew said. “It is vital to see rebalancing within the euro area with surplus economies contributing more to demand in order to ease the periphery’s adjustment process, avoid austerity fatigue, and renew Europe’s economic vibrancy.”
South Korean Finance Minister Hyun Oh Seok said “Europe needs to speed up their reforms and get the growth going.”
The Group of 20 economies said in a statement April 19 that the euro-area’s “foundations of economic and monetary union should be enhanced, including through an urgent movement towards banking union, further reducing financial fragmentation, and continued strengthening of banks’ balance sheets.”
While acknowledging Europe’s diminished growth outlook, EU officials affirmed their commitment to long-term changes.
“One has to admit that the euro zone as a whole has the lowest growth rate worldwide. On the other hand we can also show that the euro zone achieved significant structural improvements,” said European Central Bank Governing Council member Ewald Nowotny, in an interview yesterday. “For Europe, the question of how faster growth can be achieved is the central question indeed.”
Spanish Economy Minister Luis de Guindos said “Europe has to provide economic growth -- that’s what others have asked of us.”
Still, Bundesbank President Jens Weidmann said it may take “a decade rather than a year” for Europe to overcome its crisis and German Finance Minister Wolfgang Schaeuble said “it would be completely unrealistic to expect Europe to deliver high growth rates.”
ECB President Mario Draghi said April 19 that economic conditions in Europe haven’t improved since the ECB’s last meeting on April 4. ECB Governing Council member Klaas Knot told reporters that there’s little room to maneuver, and Weidmann yesterday warned that central bank action must be handled carefully.
“Monetary policy is no cure-all for the economic difficulties we’re currently facing,” Weidmann said in an interview.
Still, Governing Council member Joerg Asmussen said although the ECB had “done quite a lot” it could still cut its 0.75 percent benchmark interest rate if data show a need for cheaper borrowing costs.
Weidmann said he welcomed that this weekend’s meetings put a spotlight on the risks associated with the “ongoing expansive monetary policies” in some regions of the world, adding the Bundesbank has time and again pointed to the “risks and side-effects” that low interest rates can have over an extended period of time.
Angel Gurria, head of the Organization for Economic Cooperation and Development, said focusing too much on ECB actions or debt-reduction progress distracts from the central issues facing the EU outlook.
“It’s not fiscal policy, its not monetary policy, it’s structural change that has to happen,” Gurria said in an interview.
EU officials played up their efforts to shore up their financial sector, while also airing some of their internal disagreements about how to proceed. Germany renewed its call for treaty changes before proceeding with some steps of its banking union plan, which began this year with an agreement to put the ECB in charge of euro-area bank supervision.
Germany’s Schaeuble and Weidmann said treaty changes are needed to put a future European banking union on a sound legal footing. French Finance Minister Pierre Moscovici countered that existing treaties provide enough of a legal basis to proceed, a view shared by the Brussels-based European Commission.
“We want a full banking union and we want it fast,” Moscovici said.