FRANKFURT, Germany - Three-and-a-half years into its government-debt crisis, there are signs that Europe is adopting a gentler approach toward austerity.
Political leaders aren’t backing away aggressively from budget cuts and higher taxes, but they are increasingly trying to temper these policies, which have stifled growth and made it harder for many countries to bring their deficits under control.
The European Union is relaxing its enforcement of deficit limits until the region’s economy turns around. Countries that were bailed out by their neighbors are being given more time to repay loans, easing the pressure to cut budgets further. And financial leaders, including the head of the European Central Bank, say it’s time to place more emphasis on reviving growth.
“There has clearly been a shift in thinking,” said Christian Schulz, economist at Berenberg Bank in London.
After the crisis started in late 2009, governments dramatically cut spending - either to meet conditions for bailout loans or to reassure bond markets that they were trustworthy borrowers. These measures were intended to help countries reduce their deficits and pave the way for critical financial aid.
Promises of austerity gave the European Central Bank political breathing room to get more aggressive. The bank’s pledge last summer to buy unlimited amounts of government bonds is largely responsible for taming Europe’s financial crisis, experts say.
But austerity also caused severe economic conditions in Greece, Ireland, Portugal, Spain and Italy. Over time - as the economy of the eurozone, the 17 EU countries that use the euro, descended into recession - evidence grew that less spending and higher taxes were less effective at reducing deficits than initially thought and perhaps counterproductive.
The latest eurozone recession, which began last year, is forecast to end in the second half of this year and was the main focus of Thursday’s summit of EU leaders in Brussels.
“We are all fully conscious of the debate, the mounting frustrations and even despair of people,” said Herman Van Rompuy, president of the European Council, after the meeting ended.
“We also know there are no easy answers.”
With unemployment at a record 11.9 percent and Europeans expressing their discontent at the polls and in the streets, many of the region’s political and financial leaders are willing to postpone budget-cutting and deficit targets.
EU officials have hinted Spain, France, Portugal and Greece might be allowed more time to reduce their deficits to within the limits specified by EU rules.
European finance ministers last week agreed in principle to grant Ireland and Portugal more time to repay bailout loans to other eurozone countries. While the countries cannot abandon deficit-reduction plans they agreed to in return for loans, it does allow them to cut budgets more slowly.
European Central Bank President Mario Draghi last week urged indebted governments to move beyond spending cuts and tax increases and introduce labor reforms and other measures that would spur growth and reduce the “tragedy” of unemployment.
The rethinking of austerity gained momentum late last year after economists at the International Monetary Fund produced research that showed Europe’s austerity policies had been far more damaging than policymakers thought.
It’s hardly news to Ines Mendes of Lisbon, Portugal, a 26-year-old flight attendant and mother of a 4-year-old. She said income tax increases this year will cost her and her partner the equivalent of more than a month’s pay each over the year, further squeezing her family budget.
“We could really use a break,” Mendes said. “I don’t know why they’re doing this to us. It doesn’t make sense; it’s just killing our economy,” she said of the EU’s austerity demands imposed as part of the country’s 2010 bailout.
Advocates of austerity haven’t disappeared from the scene. Key leaders such as Germany’s Chancellor Angela Merkel still espouse the virtues of balanced budgets.
“Budget consolidation, structural reforms and growth are not contradictions but require each other,” Merkel told reporters after the summit of 27 EU countries on Thursday. “It is necessary to trim the deficits to promote growth and investment.”
But there is a difference between the rhetoric and the actions these leaders endorse. Merkel’s government agreed last year to the EU commission’s recommendation to extend deficit-reduction deadlines for Portugal, Greece and Spain. And the EU commission is now judging countries based on their so-called structural deficit - or what the deficit would be excluding the effects of the recession. That gives countries more time to get their finances under control.
The new EU stance “doesn’t mean countries don’t need to do austerity. It means they only need to do the austerity that is needed to bring a country a balanced budget in structural terms. If a country is in a recession, this approach allows some deficit,” says Berenberg analyst Schulz.
Across the eurozone, deficits as a proportion of economic output averaged 3.5 percent at the end of last year. That’s down from 4.2 percent in 2011 and only slightly above the EU target of 3 percent. However, among individual eurozone members, the picture is far less rosy - Spain and Greece are running deficits more than double the official limit.
Information for this article was contributed by Barry Hatton, Juergen Baetz, Elena Becatoros and Sarah Di Lorenzo of The Associated Press.
Business, Pages 27 on 03/16/2013