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 322.

    MH has at time complained that her local library was closed.

    --If she wasn´t the librarian and read every book -- then she swallowed them before it was closed.

    Time in Scotland was wet, damp and cold.

    With MH mentioning the Hansa League --I´m afraid she sees Scotland´s future elsewhere --where England could not stop its possible admittance if EU entry fails.

  • rate this

    Comment number 321.

    315 EU

    "It will still have cost a lot less than the destructive, sick "EU"

    2006 to 2013 British casualties in Afghan war:

    444 Fatalities

    2,116 military and civilians wounded in Action

    4,529 military and civilians hospitalised

    293 Very Seriously Injured soldiers ditto 298 personnel

    6,663 evacuated

    In 2010 death toll in Afghanistan exceeded the Falklands war

  • rate this

    Comment number 320.

    #318 QOT
    Spent so many happy days in Scotland.....and a frightening night on Rannoch Moor in a storm....
    UK wont be the same without Scotland..........I hope they stay with us !!

  • rate this

    Comment number 319.

    12 Minutes ago
    #315 EUp
    Does MH work for the EU ?

    EUp: I am pretty confident that I asked her that a long time ago and that she said she did not. Do I believe a word an "EU"-lover says?

    I am fairly confident that she and QOT are retired. I guess that they and others who have posted here are members of some "EU"-fanatics association and get finance from the "EU". Guess!

  • rate this

    Comment number 318.

    #317 UKexile

    "Does MH work for the EU ?"

    --No, She´s just a Scottish lass --with much general knowledge.

    -- Keeps us on our toes.

  • rate this

    Comment number 317.

    #315 EUp
    Does MH work for the EU ?

  • rate this

    Comment number 316.

    #312 Britpris

    "Thank you for that information. I believe it is the first time you have written something of value here."

    --we are still waiting for your first time !


    Have you started to pack your bags for your trip back to the UK ?

    Dmr is waiting for you-- with open arms, teary eyes and a big hug.

    --in UKIPLAND.

  • rate this

    Comment number 315.

    311.margaret howard
    2 Minutes ago
    DMail headline:

    "War in Afghanistan set to cost every British household £2,000 as bill soars to £4billion

    By 2020 total bill will reach £40billion, according to a new book"

    It will still have cost a lot less than the destructive, sick "EU"

  • rate this

    Comment number 314.

    309 QOT

    "you REALLY like the Hansa League --I´m beginning to also like the idea"

    Maybe that's the way forward - not the huge blocs predicted?

    What with Britain soon split after the Scots leave, the Americans ditching the poverty stricken south that cost so many lives in the civil war and after the frantic empire building of the past we've learned that small is beautiful?

    Good night

  • rate this

    Comment number 313.

    #310 Sie

    The Greeks are not proud -- if Turkey doesn´t pay for them --they will try blackmail or tears.

    -and blame it on the Germans or the USA for not assisting in their endeavor.

  • rate this

    Comment number 312.


    "- Bread dipped in good olive oil is delicious --especially when washed down with Turkish Raki."

    Thank you for that information. I believe it is the first time you have written something of value here.

  • rate this

    Comment number 311.

    DMail headline:

    "War in Afghanistan set to cost every British household £2,000 as bill soars to £4billion

    By 2020 total bill will reach £40billion, according to a new book

    Money could employ 5,000 nurses for their entire career

    Deployment in Helmand has cost £15million-a-day since 2006"

    To all EU haters - is that what you prefer to spend your money on?

  • rate this

    Comment number 310.

    What a thought. Turkey joins the EU and the first thing it has to do is bail out Greece. Oh the humanity! The humanity! What humiliation that would be for Greece. Unimaginable.

    Looks like Brussels is putting its foot down on policies in France, the UK, and Spain that don't conform to its dictates. The price you pay to be in the EU.Take notice Turkey, you could be next.

  • rate this

    Comment number 309.

    #306 MH

    --you REALLY like the Hansa League --I´m beginning to also like the idea.

  • rate this

    Comment number 308.

    Things must be really bad.Von Rompuy went to Turkey to court them into reviving their dormant EU accession application. Watch out Turkey, they only love you for your money.They'll try to shoehorn you in and as soon as you're an EU captive, the shove their open hand in your face and tell you how much you owe them. You're better off without them. Don't wreck your economy on their account.

  • rate this

    Comment number 307.

    #305 UKexile

    -- Never been presented rotten olive oil in Greece or South Cyprus then ?

    --I am in favor of the ban !

    -- Bread dipped in good olive oil is delicious --especially when washed down with Turkish Raki.

  • rate this

    Comment number 306.

    302 Chris

    "Unfortunatley this expansionism is the EU's downfall"

    Perhaps you're right. Maybe countries like your own and in the south just weren't up to the standard expected in a rich and successful union

    There are plenty of rumours about plans for a new northern union and perhaps that will be the best way forward - a bit like the old Hansa League. Ditch all surplus baggage

  • rate this

    Comment number 305.

    300 quietoaktree
    Agreement !!
    By the way although not an 'Ancient Brit´ , I am retired. My grandfathers were Irish..I have travelled, a little..Netherlands, Finland, Sweden, Norway...I now live in Hungary. I oppose the EU because it's too centralised & they interfere too ? olive oil in restaraunts

  • rate this

    Comment number 304.

    #302 Chris

    --believe what you want.

    The BBC reported the Greek demand -- only those who new the situation could interpret the actions.

    --you are not one of them !

    See #298

  • rate this

    Comment number 303.

    299 UKexile

    Why UKexile? Weather and standard of living higher abroad?

    "Sorry, the EU failed again in this matter"

    Poor Cyprus. Maybe after decades of being used as nothing but a military base by an empire in retreat it now resents being dictated to by any foreigners.


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