EU gives surprise breathing room to its ailing debtor states

The European Union is giving struggling member countries a break to meet their binding deficit targets, extending deadlines while still demanding reforms, in the clearest sign yet that the crisis management is shifting from austerity to growth-driven policies.

The move has been gradual and expected, but the final report card released Wednesday by the European Commission gave countries like Spain even more breathing room than expected. France, Italy, Portugal, Poland, Slovenia, and even better off countries like the Netherlands and Belgium, also got some reprieve.

Deficit-laden countries – especially heavyweights France, Italy, and Spain – have long pressed northern Europeans, especially Germany, to ease off their demands for cuts. The EU faces a second straight year of recession and rising unemployment, which in countries like Spain continues to rise toward an unsustainable 30 percent.

The Organization for Economic Cooperation and Development, the international body grouping the world’s most industrialized countries, warned Wednesday that the economy of 17-member eurozone will shrink by 0.6 percent in 2013, after a similar contraction in 2012. In a report, it warned that economic weakness “could evolve into stagnation with negative implications for the global economy.”

A turn toward stimulus?

The EU’s shift also comes after years of intense global pressure to mirror stimulus-driven policies in the US, Japan, and elsewhere, which are credited with helping turn those economies toward growth.

At the same time it suggests that EU policymakers are more confident that the deficit crisis in under control. And it illustrates growing resentment against austerity in Europe, which is blamed for the soaring unemployment and poverty in periphery countries that threatens to undermine future economic growth, despite governments’ efforts to bring spending under control.

“The social emergency in many parts of Europe and the increasing level of inequalities in some regions add to the pressing need for reforms," European Commission President José Manuel Barroso said.

“The fact that more than 120 million people are now at risk of poverty or social exclusion in Europe is a real worry,” Mr. Barroso said. “We need to reform, and reform now. The cost of inaction will be very high.”

It also opens the door to more stimulus-oriented policies – some of which, like job-creation programs, are already in the works – and increases pressure on Europe to move more quickly toward regional fiscal consolidation in the form of a banking union, which Germany still resists.

'Breathing space'

Spain was not only given the expected two-year extension until 2016 to decrease its deficit below the ceiling of 3 percent of the gross domestic product. It was granted margin of 6.5 percent for 2013: larger than both the 6.3 percent margin that had been anticipated and the official – and unreachable – 4.5 percent target set in 2012. That is equal to an additional 2 billion euros, which will allow Spain to ease spending cuts this year.

France, Slovenia, and Poland were also given two additional years to meet the 3 percent target, while the Netherlands, Belgium, and Portugal were given an extra year. The Commission also took Hungary and Italy out of its list of excessive deficit procedure, which threatened countries with sanctions.

But the Commission also recommended a long list of reforms countries should undertake to spur growth. Countries can decide to implement other policies, but the targets will be binding once EU leaders rubber-stamp the EU’s report in the end of June.

“It is now of paramount importance that this breathing space created by the slower pace of consolidation is used by member states for implementing those economic reforms that are necessary to unleash our growth potential and improve our capacity to create jobs,” said Olli Rehn, EU commissioner for economic affairs.