Limit Austerity, EU appartchik Barroso Says

Same Old, Same Old

By ALESSANDRO TORELLO, FRANCES ROBINSON and PAUL HANNON

A top European Union official signaled his support Monday for relaxing Europe's austerity drive, in what could be a significant break for countries struggling to hit tough budget targets amid persistent economic weakness.

In a speech, European Commission President José Manuel Barroso said the policy of austerity pursued by the EU in recent years no longer has the public backing needed to work.

"While I think this policy is fundamentally right, I think it has reached its limits," Mr. Barroso said. "A policy to be successful not only has to be properly designed, it has to have the minimum of political and social support."

His comments are the latest in a series of public statements that indicate a shift in European economic policy is under way. They also coincided with the release of new figures that showed some of the euro-zone countries with the most aggressive austerity programs were having the least success in narrowing their deficits.

The International Monetary Fund last week said the bloc should ease back on austerity, while a number of governments outside the EU have made the same call, arguing that its belt-tightening is holding back the global economic recovery and could end up being self-defeating.

The policy's support among economists has also taken a beating. A study published last week by three economists at the University of Massachusetts found basic flaws in an influential paper from 2010 by the U.S. economists Carmen Reinhart and Kenneth Rogoff that said high government debt levels hurt economic growth.

In his speech, Mr. Barroso hinted that some countries could be given longer to get their budget deficit in line with EU rules, which ostensibly limit it to 3% of gross domestic product.

"Even if the policy of correcting deficit is fundamentally correct, we can always discuss fine-tuning of pace," he said. He noted, however, that EU finance ministers would have to agree to any change in the timelines.

Spanish Finance Minister Luis de Guindos said on Sunday that his new budget plans to be presented later this week will emphasize economic growth and reduce the stress of spending cuts.

"What we are going to do now is strike a better balance between deficit reduction and economic growth," Mr. de Guindos said.

France is also appealing to the commission to get an extension to meet its targets. The country argues that while it won't meet the nominal target, it is on track to meet structural goals, which strip out the impact of a weaker economy.

The euro-zone economy has contracted for the five straight quarters to the end of 2012, with austerity contributing to declines in spending by households and businesses, and a rise in the unemployment rate to a record of 12%.

Official figures for the first quarter of 2013 will be released May 15, and most economists believe they will record a sixth quarter of decline. The IMF last week said it expects the euro zone's economy to contract again this year.

However, there are some tentative signs that the worst may be over.

Consumers across the 17 countries that share the euro became less pessimistic about their prospects in April, a development that came as a surprise in the wake of the messy bailout for Cyprus.

The European Commission said Monday that the preliminary estimate for its headline measure of consumer confidence rose to -22.3 from -23.5.

Figures released by the EU's statistics agency Monday show some of the austerity programs pursued by euro-zone governments succeeded in narrowing the gap between their revenues and spending in 2012.

But nations that began the year with wide gaps between spending and revenue and pursued the most aggressive austerity programs were the least successful in narrowing their deficits.

There were very large differences between the budget positions of individual members. Germany had a small budget surplus, while Spain's deficit widened to 10.6% of GDP from 9.4%, the widest in the euro zone.

However, that increase largely reflected the cost of bailing out the nation's banks. Excluding those costs, the Spanish deficit stood at 7.1% of GDP, down from 9.1% in 2011.

"We cannot apply a one-size-fits-all program to the European countries," Mr. Barroso said.

He singled out Ireland for praise. "It is a painful program," he said, "but it is working." Ireland sold debt normally in the markets last month for the first time since its bailout in 2010.

Unlike some of its euro-zone peers, Ireland remains convinced that austerity is working. Responding to Mr. Barroso's comments, Ireland's Ministry of Finance said the government will stick to its goal of cutting the budget deficit to below 3% of GDP by 2015.

Cyprus is likely to be the fifth euro-zone member to receive bailout loans, and its budget deficit was unchanged at 6.3% of GDP in 2012, slightly higher than earlier estimates.

In Slovenia, which has said it doesn't need a bailout to help rescue its troubled banks, the deficit fell to 4.0% from 6.4% in 2011. Slovenia's statistic agency had previously estimated the deficit at 3.7% of GDP.