Analysis: Politics force growth back on to Europe's agenda

Wed Apr 25, 2012 12:49pm EDT
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By Alan Wheatley, Global Economics Correspondent

LONDON (Reuters) - It's early days, but powerful political currents could be sweeping Europe away from its hair-shirt obsession with reducing debt and deficits regardless of the economic cost.

Any course correction will be a tug on the tiller rather than a U-turn. The euro zone will not suddenly abandon budget discipline and spend its way back to growth as Germany, Europe's paymaster, would not stand for it. Nor, in their current mood, would the bond markets.

But one three-pronged strategy under discussion, according to economists and academics, would give governments more time to lower their budget deficits to the mandated threshold of 3 percent of national output in return for a demonstrated commitment to far-reaching reforms that improve growth over the medium term.

At the same time, more funds would be mobilized from the European Union budget and the European Investment Bank to finance infrastructure and other development schemes, boosting the euro area's chronically weak demand.

If all went well, the vicious circle of contracting output triggering ever more growth-sapping budget cuts to meet self-imposed deficit reduction targets would be broken.

Andre Sapir, a scholar at Bruegel, an influential think tank in Brussels, believes a political commitment to a deal along these lines, if not agreement on a detailed package, could crystallize in time for the next meeting of EU leaders in June.

"We are headed for a June summit where there will be a growth initiative of some sort," Sapir said.