Recession replaces debt as top EU worry with joblessness rising

‘Simple Allegation’

“The simple allegation that the commission pursues austerity inflexibly does not hold,” Marco Buti and Nicolas Carnot of the commission’s economics department said in a policy paper yesterday. “Nor obviously does the opposite accusation that the framework is being weakened.”

Greece, Portugal and Spain were granted extra deficit- reduction time last year. More extensions may come “in the near future,” the two officials wrote. Portugal is set for another respite, the commission’s president, Jose Barroso, told Expresso newspaper last week.

France is counting on estimates that it has made sufficient reductions in the “structural” deficit -- a figure that factors out the effect of the economic cycle -- to escape a European order to cut more.

“We are ready to use the flexibility incorporated in the stability and growth pact, provided of course that governments make the necessary effort in structural terms,” Barroso said today.

Merkel Focus

The political leader most closely associated with austerity, German Chancellor Angela Merkel, is shifting focus as well, from the day-by-day fight to save the euro to her campaign for a third term in September elections.

Beppe Grillo, a comedian-turned-politician who grabbed 25% of the vote in Italy’s election, took his anti-austerity grievances to the German public yesterday by saying that northern countries are conspiring to kick Italy out of the euro.

Once banks in northern Europe have cashed in their Italian bonds, Grillo told Germany’s Handelsblatt newspaper, Italy will be dropped out of the euro “like a hot potato.”

In a nod to Italy, the draft summit statement said the euro rules provide space for “productive public investment” by countries with deficits under the limit of 3% of gross domestic product. Italy was one of eight euro states to pass that test last year.

Monti’s Plea

The summit marks the final European appearance by caretaker Italian Prime Minister Mario Monti, who blamed his 10% showing in the election on a backlash against budget cuts he imposed.

“Margins for flexibility were introduced in European budget rules and we will ask that they can be used,” Monti said.

At the European level, a “pro-growth” policy bias may even play to Merkel’s advantage, enabling her to siphon votes away from the opposition Social Democrats -- and potentially forge a coalition with them if dictated by the election outcome. German officials have backed the commission’s approach, indicating that the Berlin leadership is sensitive to criticisms that budget cutting has gone too far.

Bloomberg News

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