Schaeuble Signals Support for Easier European Austerity

U.S. Treasury Secretary Jacob J. Lew said European policy makers are still falling short in efforts to revive their economy, intensifying pressure on them to further ease their budget-cutting.

“We feel very strongly there needs to be the right balance between austerity and growth,” Lew said in an interview on CNBC Television in London today. “Overall, Europe is going to need to do a little bit better. There’s room for progress.”

Europe’s recession is emerging as the main topic of discussion for Lew and fellow finance chiefs from the Group of Seven as they meet in the U.K. seeking new ways to rally lackluster global growth. The lobbying may be paying off, with French and German officials acknowledging to varying degrees a need to blunt their fiscal squeeze.

“We reject an austerity track, this dogma which slows growth,” French Finance Minister Pierre Moscovici said in an interview with Deutschlandfunk radio today. European Union Economic and Monetary Affairs Commissioner Olli Rehn said today that “we can for the moment afford a smoother path of fiscal adjustment.”

In the biggest rhetorical shift, the German government is indicating acceptance that austerity can be overdone. Governments have earned “enough room to maneuver” to act, having reduced budget deficits and bond yields, German Finance Minister Wolfgang Schaeuble said yesterday.

Record Unemployment

Forcing the shift are signs the euro area’s slump is outlasting forecasts and driving unemployment to record levels at a time when growth in Japan and the U.S. is also below par.

“Our task is to nurture the recovery,” U.K. Chancellor of the Exchequer George Osborne said before chairing the G-7 meeting in Aylesbury, north of London. “We cannot take the global recovery for granted.”

Evidence has mounted in recent weeks that Europe is willing to cool the austerity drive that marked its response to the three-year debt crisis. France and Spain may be given two extra years to meet EU deficit goals, while other nations, like the Netherlands, Poland and Slovenia, may get one additional year.

Lew’s call for Europe to do more echoes predecessor Timothy F. Geithner, who often used forums such as the G-7 to press Europe to fix its debt and economic woes faster. The new Treasury chief, who took office in February, today used the U.S. as an example for Europe. He said that delaying the reduction of its budget deficit had left the U.S. with a stronger economy and leeway to restore fiscal order.

Lew Leaning

He also said he will lean on European policy makers to do more to fix credit markets to ensure easier financing for the small- and medium-sized businesses that often provide the bulk of hiring. The European Central Bank has said it’s searching for remedies.

The U.S. position was criticized as “ambiguous” by Canadian Finance Minister Jim Flaherty. “They seem to be wanting to encourage growth more than fiscal responsibility,” he said in an interview.

With the yen weakening below 101 per dollar for the first time since April 2009, Governor Haruhiko Kuroda sought to quell any criticism by saying the Bank of Japan isn’t targeting a currency level as it boosts bond buying to hit a 2 percent inflation target.

“Everybody has said they would never seek to manipulate foreign exchange rates as an instrument to boost growth,” Schaeuble said. Lew said that “the world community has made clear that domestic tools that are designed to deal with domestic growth are within the bounds of what the international community thinks is appropriate.”

‘Monetary Activism’

Osborne said he will use the meeting as “an opportunity to consider what more monetary activism can do to support the recovery, while ensuring medium-term inflation expectations remain anchored.”

Highlighting the euro zone’s economic weakness, unemployment reached 12.1 percent in March, with a level of 26.7 percent in Spain, according to the EU’s statistics agency. Greece yesterday reported 27 percent unemployment in February.

The 17-nation euro-region economy has contracted for five quarters, and the recession probably extended into the first three months of this year, according to a Bloomberg News survey of 19 economists. The European Commission sees gross domestic product falling 0.4 percent this year.

Not all in Europe are willing to dim the fiscal focus. “It’s about restoring confidence in the sustainability of public finances, and that’s one important precondition for sustainable growth,” Bundesbank President Jens Weidmann said today.

Some are continuing the course. Seeking to pull itself out of recession and a banking crisis without outside assistance, Slovenia this week offered an economic overhaul including a higher sales tax, a property levy and cuts to public-sector wages to help narrow its budget shortfall.

The G-7 officials conclude their talks tomorrow and may not release a formal communique.

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