EU dials back austerity amid recession, youth unemployment

Anti-Austerity Tilt

The commission’s verdicts require an endorsement by national finance ministers. While Germany has signaled that it won’t seek to overturn the recommendations, the anti-austerity tilt has provoked criticism from Berlin in the runup to national elections in September.

“We won’t agree to a weakening of the budget rules,” Norbert Barthle, parliamentary budget spokesman for Chancellor Angela Merkel’s Christian Democratic Union, said May 27.

After a Brussels summit last week, Merkel reassured her home audience that European governments aren’t throwing more cash at economic problems beyond a previously announced seven- year, 6 billion-euro ($7.7 billion) initiative to find jobs for young people. That sum is less than 0.01% of the 27- nation EU’s GDP.

The commission argued that the extra deficit-reduction time is justified because the economy has tailed off, and said that it granted the concession only to countries that are making economy-boosting reforms to their health care or pension systems or labor markets.

Labor Market

France, for example, was told to cut social-security costs for businesses in order to encourage hiring and to boost competition in the energy and transport industries. Spain, already granted a one-year deficit-cut extension last year, must trim health-care costs and pursue “active” labor market policies, the commission said.

European deficit policy is now taking a more “intelligent, flexible approach,” Spanish Prime Minister Mariano Rajoy said in Paris late yesterday after meeting French President Francois Hollande.

Deficits have been less of a concern for investors since last year’s European Central Bank pledge of potentially unlimited intervention in bond markets defused the risk of a euro breakup. The market now charges France 51 basis points more than Germany to borrow for 10 years, compared to 190 basis points in November 2011.

“A key concern is that softening the fiscal rules may impact the credibility of the euro zone’s fiscal framework,” Nick Kounis, head of macro research at ABN Amro in Amsterdam, said in a note yesterday. “Short-term growth-enhancing policies are welcome, but the credibility of the fiscal framework needs to remain in place.”

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