Era of austerity has run its course, EU says

Mon Apr 22, 2013 4:15pm EDT
 
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By Robin Emmott

BRUSSELS (Reuters) - France and Spain fell short of their budget deficit goals last year and debt levels swelled across the euro zone but the pressure may be easing on Paris and Madrid as the European Commission signals an end to sharp spending cuts.

Outlining the state of Europe's accounts in 2012, the EU's statistics office Eurostat said on Monday that France posted a deficit of 4.8 percent of economic output, higher than its 4.5 percent target. Spain's shortfall was the largest in the EU.

With budget cuts blamed for a second straight year of recession, the EU's top economics official Olli Rehn indicated over the weekend that more flexibility on tough economic targets was needed. His boss, European Commission President Jose Manuel Barroso, said on Monday that austerity had reached its natural limits of popular support.

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

Budget cuts have been at the centre of the euro zone's strategy to overcome a three-year public debt crisis but they are also blamed for a damaging cycle where governments cut back, companies lay off staff, Europeans buy less and young people have little hope of finding a job.

Crippling levels of unemployment and outbreaks of violence in southern Europe are now forcing a rethink, with the focus shifting to economic growth strategies.

Despite cuts and tax increases, Spain's budget shortfall was 7.1 percent, excluding bank recapitalization, higher than the government's 6.98 percent official year-end reading and well above Madrid's original target of 6.3 percent.

Adding in the cost of recapitalizing Spain's banks and a 40 billion euro ($52 billion) bank bailout from the euro zone, Spain's deficit was nearly 11 percent in 2012, higher than the European Commission's forecast of 10.2 percent, and an increase from the 9.4 percent deficit of 2011.   Continued...

 
European Commission President Jose Manuel Barroso addresses a news conference in Vienna April 4, 2013. REUTERS/Leonhard Foeger