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Saturday, October 25, 2014         

NEW YORK TIMES


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European Union pressed to reconsider cuts as a cure

By ANDREW HIGGINS

New York Times

POSTED:



BRUSSELS » Unemployment has surpassed Great Depression-era levels in southern Europe. Recession is drifting to the once resilient economies of the north. Even some onetime hawks on government spending say they cannot cut any more.

After years of insisting that the primary cure for Europe's malaise was to slash spending, the champions of austerity, most notably Chancellor Angela Merkel of Germany, find themselves under intensified pressure to back off unpopular remedies and find some way to restore faltering growth to the world's largest economic bloc.

On Friday, Prime Minister Mariano Rajoy of Spain, who once promoted aggressive budget cuts, became the latest leader to reject European Union targets for reducing deficits.

That is one of several developments — a recent court ruling against job cuts in Portugal, a new, austerity-averse prime-minister-in-waiting in Italy and mounting doubts among Europeans and even the International Monetary Fund — that have forced senior officials in Brussels to acknowledge that a move away from what critics see as a fixation on debt and deficits toward more growth-friendly policies is necessary.

"There has been a clear shift in thinking," said Guntram Wolff, a German economist who has worked at the European Commission, the union's policymaking arm, and is now acting director of Bruegel, a Brussels research group.

The flurry of activity comes after an influential academic paper embraced by austerity advocates as evidence that even recessionary economies should cut spending to avoid high debt levels, written by the Harvard scholars Carmen M. Reinhart and Kenneth S. Rogoff, came under attack for errors that opponents of austerity say helped lead European policymakers astray.

Europe is not about to throw open the spending spigots in the 27 nations of the EU, even as the bloc teeters on the edge of a new regionwide recession, but officials are clearly shifting toward what Leonardo Domenici, an Italian member of the European Parliament, described as "austerity with a human face."

Even Merkel has tried of late to soften her image as the unbending deficit scold of Europe. Asked at a forum in Berlin this week whether the "screw of austerity" had been turned too tight, she complained that what used to be "called saving or consolidation or balanced budgets" is "now called austerity," adding that this "really sounds like something completely evil."

In Brussels, the president of the European Commission, Jose Manuel Barroso, said Europe had been right to tighten its belts but now needed to soften its approach to win back an angry public. "While this policy is fundamentally right, I think it has reached its limits in many respects," he said. "It has to have the minimum of political and social support."

Hints of a new approach in Europe are likely to be greeted as good news by the Obama administration, which has urged healthy European economies to stimulate growth with increased spending and more relaxed monetary policy. The U.S. economy, where government spending has not been reduced as drastically, looks relatively robust in comparison with Europe.

Olli Rehn, a tough-minded Finn responsible for economic and monetary affairs at the European Commission, has taken pains in recent days to stress that, with financial markets mostly becalmed, rapid "fiscal consolidation" — essentially spending cuts and tax increases — has run its course and will slow to a less painful pace.

Such consolidation, he told a hostile audience in the European Parliament on Thursday, will this year be just half what it was last year, and substantially less severe than cuts planned in the United States. "It is important that we strengthen the social dimension," he added, describing unemployment in hard-hit countries such as Spain, which this week reported a jobless rate of 27.2 percent, as "unacceptably high."

The change, Wolff of Bruegel said, began months before the recent academic flap over the Reinhart and Rogoff research but had often gone unnoticed, in part because Germany, the dominant voice in the union's economic policy, "didn't want to make a big fuss" and risk pushback from German politicians opposed to cutting Europe's heavily indebted economic laggards any slack.

While Merkel, who faces an election in September, may be backing away from the word "austerity," however, she is not aligning herself with France's Socialist president, Francois Hollande, and others in demanding that the policy behind the word be radically revised.

EU officials insist that their economic policy has never been as dogmatic or narrowly focused on spending cuts as critics claim, and they say they have long since moved beyond just austerity. Unable to speak plainly in any of the union's 23 official languages, however, they have had trouble explaining their efforts in a manner that people can understand.

Like Merkel, the EU shuns the word "austerity," which has been banished from the official lexicon in favor of the technocratic euphemism "fiscal consolidation." At a summit meeting in Brussels in February, the union's 27 leaders, who met just out of earshot of thousands protesting austerity, responded to public fury by endorsing "differentiated, growth-friendly fiscal consolidation," code for flexible policies tailored to each country rather than doctrinaire, one-size-fits-all debt and other targets.

The linguistic adjustment, while doing little to calm protesters, has since translated into real steps to relieve economies straitjacketed by budget cuts. Portugal and Ireland, for example, were this month given seven more years to repay bailout loans. Spain, France and the Netherlands are meanwhile likely to get a green light from Brussels in coming weeks to miss what are supposed to be mandatory budget deficit targets.

The rule bending does not go down well with countries that have played by the book, like tiny Estonia, which, along with its Baltic neighbor Latvia, is feted by fans of austerity as proof that harsh medicine works. "If you signed up for something, why start yelling that the rules are unfair?" asked President Toomas Hendrik Ilves of Estonia, which, after a catastrophic slump, now has one of Europe's few economies with robust growth.

In much of Europe, austerity has become a byword for misery and helped stir a fierce backlash against the European project, a venture that began in 1951 to bind the continent's previously warring states into a zone of harmony and, it was hoped, prosperity.

Public confidence in the EU has slumped to all-time lows, according to survey data compiled by Eurobarometer, the union's polling arm, and leaked this week by a research group, the European Council on Foreign Relations. Seventy-two percent of those polled in Spain said they "tended not to trust" the group, compared with 23 percent in 2007, the year before Europe got swept up in a global financial crisis. Distrust has also soared in Germany, rising to 59 percent from 36 percent.

"At a time when so many Europeans are faced with unemployment, uncertainty and growing inequality, a sort of ‘European fatigue' has set in," Barroso, the commission president and a former Portuguese prime minister, acknowledged recently.

Politicians on the left who have long campaigned against austerity worry that the softer tone on spending cuts adopted by Barroso and others will bring only policy tweaks on the margins. "Are we just fiddling while Rome burns?" asked Udo Bullmann, a German Socialist. "Europe is burning," he told Rehn in Parliament on Thursday.

Pervenche Beres, Socialist chairwoman of the Employment and Social Affairs Committee, is skeptical that signs of greater flexibility will result in a dramatic change of policy. "They still want to kill Keynes," she said, referring to the British economist John Maynard Keynes, who believed that fiscal stimulus, not contraction, was sometimes the best solution to a crisis. "They always make minimal changes at the very last minute when they have no choice," she added.





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