Countries get more time to tame deficits but asked to push through reforms

The European Union softened its demands for austerity on Wednesday when it gave France, Spain and four other member states more time to bring their deficit levels under control so that they can support their ailing economies.

The EU Commission, the 27-nation bloc’s executive arm, said the countries must instead overhaul their labour markets and implement fundamental reforms to make their economies more competitive.

Issuing a series of country-specific policy recommendations in Brussels, Commission President Jose Manuel Barroso said that the pace of reform needed to be stepped up across the EU to kick-start growth and fight record unemployment.

After Europe’s crisis over too much debt broke in late 2009, the region’s governments slashed spending and raised taxes as a way of controlling their deficits — the level of government debt as a proportion of the country’s economic output.

But austerity has also inflicted severe economic pain.

Slashing spending and raising taxes have proved to be less effective at reducing deficits than initially thought. As economies shrink, so do their tax revenues, making it harder to close those budget gaps. With rising unemployment, there is a growing consensus that governments must shift their policies toward fostering growth to end the downward economic spiral, even in countries like Germany that have long insisted vehemently on rigorous fiscal policies. Besides France and Spain, the Commission is also granting the Netherlands, Poland, Portugal and Slovenia more time to bring their deficits below the EU ceiling of three per cent of annual economic output. That means they will be allowed to stretch out spending cuts over a longer time as they try to fight record unemployment and recession.

The Netherlands and Portugal are now granted one additional year, whereas France, Spain, Poland and Slovenia are granted two additional years each.

The new measures, however, are not a sign that Europe has abandoned its message of austerity and strict budgetary discipline altogether. Moreover, bailed-out Greece, Ireland, Portugal and Cyprus still have harsh deficit targets they have to meet to continue getting bailout loans.

Mr. Barroso rejected suggestions that the Commission bowed to political pressure and switched focus away from austerity.

Singling out France, the 17-nation eurozone’s second-largest economy, as an example of how the EU is still keeping an eye on its members’ economies, Mr. Barroso said that “this extra time should be used wisely to address France’s failing competitiveness”.

The Commission’s recommendations will become legally binding and shape the countries’ fiscal policies once approved by the EU’s leaders, who will discuss them at their summit next month.

Some countries were also dropped off the Commission’s list of nations whose budgets are under increased surveillance because of an excessive deficit. They include Italy, Latvia, Hungary, Lithuania and Romania.

Since the debt crisis erupted, EU nations have agreed to give the bloc’s executive arm more powers in scrutinising national budgets, complete with the ability to punish or issue binding policy recommendations for countries running excessive deficits.

In practice, however, the Commission wields considerable power in its dealings with smaller member states, but big nations like France are hard to bring into line.

— AP

  • Countries must instead overhaul labour markets

  • Commission denies it bowed to political pressure