Recession replaces debt as top EU worry with joblessness rising

European leaders are loosening the economic shackles once demanded by Germany as the recession and mounting unemployment in southern Europe shove aside the debt crisis as the euro area’s biggest headache.

A two-day Brussels summit starting today will endorse plans for “structural” assessments of national budgets, according to a draft statement, using code for granting countries such as France, Spain and Portugal extra time to bring down deficits.

“We have to restore sound and sustainable public finances, via continued differentiated fiscal consolidation and focused on structural efforts,” European Union President Herman Van Rompuy said at a pre-summit briefing.

European politicians are cloaking the shift in language designed to reassure investors who have driven borrowing costs lower since mid-2012 that balanced budgets remain the goal. The relative calm in markets was barely disturbed by last month’s inconclusive election in Italy. Another milestone toward overcoming the crisis came yesterday, when Ireland sold 10-year bonds for the first time since its bailout in 2010.

As a result, officials in Brussels and national capitals said that an aid package for the next problem country, Cyprus, doesn’t even need to be discussed at the summit. It will be dealt with tomorrow starting at about 5 p.m., at a separate meeting of euro-area finance ministers.

Cyprus Options

Euro finance chiefs are considering a mix of options to reduce the size of the Cypriot package to near 10 billion euros ($13 billion) from about 17 billion euros that’s been under discussion, Dutch Finance Minister Jeroen Dijsselbloem, who chairs the ministers’ meetings, said late yesterday in The Hague. Nine months of talks have yet to deliver a solution for Cyprus, which accounts for 0.2% of the recession-wracked euro economy.

The 17-nation currency region will follow last year’s 0.6% contraction by shrinking 0.3% in 2013, the first back-to-back decline since the euro’s debut in 1999, the commission forecasts. It sees bloc-wide unemployment at 12.2% in 2013, with joblessness as high as 27% in Greece and 26.9% in Spain.

Pressure remains on France, Italy and the countries tapping emergency financial aid to make their economies more productive by reducing labor costs and deregulating professions. The commission, the Brussels-based enforcer of the budget rules, fended off attacks from southern Europe that it has been too strict and parried warnings from northern Europe that it is becoming too lax.

‘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

About the Author