E.U. Proposes Giving Countries Time to Cut Deficits

But the Brussels-based European Commission also cautioned against the temptations of debt-fueled economic stimulus, stressing in its annual review of economic policy recommendations that Europe instead needs to dismantle rigid labor regulations and remove other “structural” obstacles to growth.

The mixed message marked Europe’s latest response to an economic crisis that has led to six consecutive quarters of negative growth, left even previously robust northern economies battling recession and pushed overall unemployment to nearly 12 percent and to more than twice that in Spain and Greece.

“The fact that more than 120 million people are at risk of poverty or social exclusion is a real worry,” said José Manuel Barroso, the president of the European Commission, at a news conference. “There is no room for complacency,” he said, describing the situation in some countries as a “social emergency.”

Addressing concerns that Europe has pushed too hard for spending cuts, Mr. Barroso — using an economists’ euphemism for austerity — said “we now have the space to slow down the pace of consolidation.” But he also warned that “growth fueled by public and private debt is not sustainable.” This, he added, is “artificial growth.”

He complained that a bitter policy debate that has often cast austerity as the enemy of growth “has been to a large extent futile and even counterproductive.”

Five year after the global financial crisis swept in from the United States, most European countries, with the notable exception of Germany, are still stuck in economic doldrums and show scant sign of even the modest recovery achieved by the United States and Japan, which have both opted for more government-funded stimulus than Europe.

This dismal record has put champions of fiscal rigor at the European Commission under intense pressure to back off unpopular budget cuts and instead follow the prescriptions of John Maynard Keynes, the late British economist who urged that government spending be ramped up in times of crisis.

The policy recommendations announced Wednesday in Brussels don’t suggest any U-turn in policy but they do confirm a slow but steady shift away from swiftly limiting deficit spending. Olli Rehn, the commission’s senior economic policy maker, announced that seven countries would be given more time to reach a deficit target of 3 percent of gross domestic product.

France, Poland, Slovenia and Spain, he said, will be given an extra two years, while Belgium, the Netherlands and Portugal will each get an extra year.

Mr. Rehn said that Europe still needs “fiscal consolidation” in the long-run but added that its pace this year would be “half what it was last year and to some extent it will be slowed further.” The decision to give France more time, he said, was based on expectations that its socialist president, François Hollande, would push through long-stalled reforms to cut the cost of hiring workers and boost the country’s flagging competitiveness. A key part of this, Mr. Rehn said, is pension reform.

Mr. Hollande responded angrily to the commission’s proposals, particularly those concerning the pension system. “The European Commission cannot dictate to us what we have to do,” French media quoted the president as saying. Mr. Hollande insisted that the shape of any pension reform, a highly contentious issue in France, “is up to us, and to us alone.”

France’s legislature earlier this month enacted a modest trim of labor regulations but Mr. Hollande, under fire from within his own party and deeply unpopular with the public at large, faces an uphill struggle to implement reforms that, when attempted by his predecessors, led to large street protests and labor unrest.

The extension granted to France and others immediately raised eyebrows among some analysts, who said these countries might use them as an excuse to relax their reform efforts. “Countries are going to interpret these recommendations in self-serving ways,” said Mujtaba Rahman, the director for Europe for the Eurasia Group, a research group. “The commission argues its rules are being applied intelligently, but countries such as France will use this to argue they have prevailed on Europe to end austerity.”

Wrangling over how to best address Europe’s crisis has created deep splits, dividing richer countries from poorer ones and triggering a widespread public backlash against the European Union and established political elites in individual countries. It has also divided policymakers in Brussels.

In a remarks published Wednesday by German media, the energy commissioner, Gunther Oettinger, scoffed at assurances that France is working to get its economic house in order and said “too many in Europe still believe that everything will be fine.” France, he said, “is completely unprepared to do what’s necessary,” while Italy, Bulgaria and Romania “are essentially ungovernable.” The European Union, he added, “is ripe for an overhaul.”

Mr. Barroso, the commission president, declined to comment on Mr. Oettinger’s remarks.

Andrew Higgins contributed reporting.

Article source: http://www.nytimes.com/2013/05/30/business/global/eu-proposes-giving-countries-time-to-cut-deficits.html?partner=rss&emc=rss