France declares austerity over as Germany offers wiggle room

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Finance Minister Schaeuble said in a speech today in Hamburg that the European Commission decision to give some euro states more time to reduce their budget deficits was “right.” He said additional time granted must be used to revamp economic structures hindering growth.

“Markets should be fine with” slowing austerity “as long as governments keep focusing on structural reforms,” Joachim Fels, co-global head of economics at Morgan Stanley in London, wrote in a note yesterday. “All fingers crossed.”

The task was underscored last week when the commission predicted little relief through next year for the 17-nation euro area’s record unemployment. Average joblessness, now 12.1%, will remain above 12% through 2014, according to the commission’s May 3 predictions.

With French gross domestic product now seen by the commission as shrinking this year, Moscovici and Hollande have led the charge against German-inspired budget-cutting. Moscovici and Schaeuble are scheduled to meet in Berlin tomorrow, along with Bank of France Governor Christian Noyer and Bundesbank chief Jens Weidmann.

Bonds

Bond markets greased by the developed world’s central banks are providing room for Europe’s politicians to play to their domestic audiences. France sold 10-year bonds at a record-low yield of 1.81% last week; they yielded 1.82% today. Yields on Italian two-year notes fell below 1% for the first time on record. Spain’s 10-year yields fell below 4% for the first time since October 2010.

Meantime, following an interest-rate cut to a record low of 0.5% last week, Draghi said the ECB had an “open mind” about the unprecedented step of charging banks to keep cash at the central bank with so-called negative deposit rates.

Moscovici’s declaration amounts to an acknowledgment that France will avoid a sanction for missing 2012 budget-deficit targets and for failing to reach the European Union ceiling of 3% of GDP this year. The shortfall will amount to 3.9% of GDP this year and 4.2% next year with no policy change, the commission said.

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