Shift in eurozone policy of austerity

OECD Chief Economist Pier Carlo Padoan OECD Chief Economist Pier Carlo Padoan said Europe was in a "dire situation".

In Brussels a bugle sounded on Wednesday. It marked the retreat from austerity. It was not presented like that, of course, but six eurozone economies have been allowed to breach the rules on reducing deficits.

Those governments in France, Spain, the Netherlands, Poland, Portugal and Slovenia, will be given more time to make spending cuts so as not to throttle fragile growth.

Policing budgets and reducing spending have not been abandoned but they are no longer the priority. European officials, these days, fear recession and unemployment more than debt and deficits.

''The reality is that the tide has turned decisively against the entire economic reform drive in the eurozone," said Nicholas Spiro of Spiro Sovereign Strategy.

Increasingly the charge is made that the policies, designed in Berlin and Brussels, have deepened the recession in countries like Greece and Portugal and have led to a sharp rise in unemployment.

Others say that officials seemed to have been more influenced by rising resentment towards the EU than by the fact of unemployment itself.

'Dogmatic adherence'

Professor Simon Evenett of Global Trade Alert says: "Dogmatic adherence to austerity has failed. Poor economic results didn't prompt Brussels to change heart; the slump in public support for the European project did."

This shift away from rigidly-enforced austerity comes on the day that the OECD delivered a sobering assessment of Europe. It predicted that the eurozone economy would shrink 0.6% this year - far worse than previous forecasts.

Its chief economist Pier Carlo Padoan said: "Europe is in a dire situation." It expects the eurozone to fall further behind the recovery taking place in the United States and Japan.

So today France has been given an extra two years to reduce its deficit, from 3.9% of GDP to 2.8% in 2015. But Paris has been told to reform its pension system by the end of the year and loosen up its labour market. The message is that it can no longer rely on increasing taxes. Reducing social security contributions will prove a major challenge for President Francois Hollande.

Spain has also been given an extra two years to reduce its deficit and get its finances under control. There were two warnings today of how deep the Spanish problem is.

The OECD said the jobless rate would rise to 28% next year. The Bank of Spain warned that the recession would continue, although the rate at which unemployment increases may well slow. That might just boost consumer confidence. The Commission said today that Spain's "debt overhang" remains a matter of concern.

Resentful generation

Italy has been taken off the list of those countries which were under increased surveillance because it had lowered its deficit - but the debt-to-GDP ratio is still forecast to reach 132% by 2014.

Slovenia, which many suspect might need a bailout later in the year, has not only been given more time to reduce its deficit but has been told to hire external advisers immediately to review the quality of its bank assets. The country has also been told to move swiftly to privatise state assets and clean up its banks, to avoid needing a rescue.

Germany has been nudged to support wage growth in order to boost domestic demand, which would help other European countries hoping to export to Germany.

In exchange for the new leniency, many countries are being told to deepen structural reforms - loosening up the labour market.

European officials believe that such reforms are the key to finding growth and increasing competitiveness, but the problem is that they take time and can be counter-productive when introduced in a recession.

Yesterday, Europe's leaders were warning of a future generation turning against the whole European project if high unemployment persisted. The prospect of a lost and resentful generation is haunting officials in Brussels.

There was one hopeful note from the Secretary-General of the OECD, Angel Gurria. He predicted that some of the reforms already undertaken will soon bear fruit. He pointed out that southern Europe had moved more swiftly than elsewhere to loosen up its labour market and that boded well for the future.

But the message today was that the exit from the eurozone crisis is a long way off, with fragile economies, many in recession and with rising unemployment. The OECD warned that prolonged weakness in Europe could lead to a period of stagnation.

Gavin Hewitt Article written by Gavin Hewitt Gavin Hewitt Europe editor

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  • rate this

    Comment number 142.

    "The Empire died MANY decades ago"

    Britons do not not want an empire, just the right to NOT be part of a European Empire!

    "That said, I am FOREVER grateful to the English people, so many unsung heroes, and to Churchill during WWII"

    Very kind of you to say so. My father (WWII) & grandfather (WWI & WWII) both felt that European freedom, democracy & nationhood were worth fighting for

  • rate this

    Comment number 141.

    Back on subject, this is a worrying move as it is sending signals to the under performing members that the tap will be turned back on. Until we get the deficit down to a manageable level we are living on borrowed time. The US is experiencing a so called recovery however their deficit is actually increasing and as such they are on track for fiscal disaster as is the EU / EZ. TBC....

  • rate this

    Comment number 140.

    Your offensive posts are becoming tiresome. However, now that every argument for staying in the EU has been debunked and ridiculed; resorting to insult is all that remains

    On topic: you don't even mention the most important issue in that the UK benefit system has a significant non-contributory element. When EU nations ALL use a similar system THEN we can talk about equality

  • rate this

    Comment number 139.

    136. Anyway, he/she was only repeating what the media are reporting and pointing out that the EU is playing into the hands of those on the fringes of the Right who will use this as further ammunition.
    Oh, and by the way, using capital letters doesn't make your argument any more coherent.
    I've finished now.

  • rate this

    Comment number 138.

    137 In addition, if you check out the rules and regulations regarding the habitual residence test you may find that they are actually quite fair. So fair they even apply to UK citizens returning to the UK after a period living abroad - is that not treating people equally?

  • rate this

    Comment number 137.

    136 - Erm, I don't think our Daily Mail reader was suggesting that EU nationals get better benefits than UK claimants.
    And you fall into the trap of calling anyone who disagrees with further integration a swivel eyed loon. The only swivel eyed loons in this debate are of the Europhile variety.

  • Comment number 136.

    This comment was removed because the moderators found it broke the house rules. Explain.

  • rate this

    Comment number 135.

    Apparently it's now illegal for the UK to inspect the validity of benefit claims from EU members and the UK must go to court to hear a case that will more than likely outlast the union itself.

  • rate this

    Comment number 134.

    Nice, the EU is taking the UK to court to force us to pay more benefits to immigrants. This will play nicely into the hands of UKIP.
    If they want a better press, they ought to give it some more thought.

  • rate this

    Comment number 133.

  • rate this

    Comment number 132.

    Democratic capitalism, as it stands, can only mean more debt based growth in the West, just like the last 20 or 30 years.Sure, you can try fascism (just like the Chinese) but Western workers still won't be anything like as productive as the Chinese.

    The same old, same old isn't going to cut it anymore, no matter what Western leaders (sic) do or what the public think.

  • rate this

    Comment number 131.

    #130 Then try to mark more clearly the difference between people and government, as I try to do when I think about the German people, Germany, its government, and especially its central bank. Otherwise it all quickly starts sounding xenophobic, and I think that your xenophobic posture against the UK / England and Greece as a monolithic whole is very welcome by any racist in both countries.

  • rate this

    Comment number 130.

    #128 77RA

    -- Sounds Breek to me on what you both agree.

    --The UK is a part of the problem with an incompetent government

    --not a part of any solution for the UK -- and definitely not for anyone else.

  • rate this

    Comment number 129.

    Insisting on proclaiming the supremacy of one country over another does not help any plan to reform dysfunctional institutions in the EU. It sounds xenophobic to me, and you seem to do it again and again with some countries. It does not help, at all. By doing so, again and again, you just help UKIP, BNP & EDL. Are you aware of it ?

    Good night

  • rate this

    Comment number 128.

    #125 Sorry, but that sounds like wishful thinking, not realism, and you know, as a realist. You say it can’t be done. I believe it can be reformed, and it makes sense to reform it, but it won’t be reformed overnight.

  • rate this

    Comment number 127.


    So you want one Parliament to Rule Europe:

    Will English will be it's common, official language?
    Will we keep the Euro?
    Will economic policy be guided by the Germans?
    How will elections be held?
    Will Europe be a democratic Republic?
    Will you still be obliged to curtsy to the Queen?
    Will you allow Turkey into the EU?
    Will taxpayers be required to cover bad bank loans?

  • rate this

    Comment number 126.

    #123 77RA

    The UK has shown that it cannot raise the living standards of its citizens.

    Own currency and almost energy independence --has made no impact -- walk around any UK town and see the failure and misery for yourself.

    --there is something inherently dysfunctional in the UK --with or without the EU or EEC.

    It is a pipe dream to believe anything will change without external influence.

  • rate this

    Comment number 125.


    "I would bet that there are so many people in the EU who would support its reform and survival supported by sensible and flexible policies."

    You are almost there!

    But how do you reform something that is being underpinned by new "laws" every day of the week?

    Answer: You can't! You have to start over!

    We need a plan to Break Apart the entire EU and then reinvent it anew!

  • rate this

    Comment number 124.

    If the UK plan to reform the EU is hijacked by the City in order to succeed in turning the UK into the Cayman Islands, I think there’s no support for that elsewhere in Europe. We need reforms, not more tax heavens.

  • rate this

    Comment number 123.

    So why don’t we all give bipartisan support to Cameron’s plan as outlined in his London speech, rather than insisting on xenophobic postures ? I would bet that there are so many people in the EU who would support its reform and survival supported by sensible and flexible policies. We need reforms, NOT xenophobia or racism. Neither should we be deceived by the City of London and its lobbies.


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