BRUSSELS - The European Union softened its demands for austerity Wednesday when it gave France, Spain and four other member states more time to bring their deficit levels under control, so that they can support their ailing economies.
The European Union Commission, the 27-nation bloc’s executive arm, said the countries must instead overhaul their labor markets and implement fundamental changes to make their economies more competitive.
Issuing a series of country specific policy recommendations in Brussels, Commission President Jose Manuel Barroso said that the pace of such changes needed to be stepped up across the European Union to kick-start growth and fight record unemployment.
“We need to reform, and reform now. The cost of inaction will be very high,” Barroso said. “There is no room for complacency.”
After Europe’s crisis over too much debt broke in late 2009, the region’s governments cut spending and raised taxes as a way of controlling their deficits - the level of government debt as a proportion of the country’s economic output.
But austerity has also inflicted severe economic pain.
Spending reductions and higher taxes have proved to be less effective at reducing deficits than initially thought. As economies shrink, so do their tax revenues, making it harder to close those budget gaps.
Besides France and Spain, the commission is also granting the Netherlands, Poland, Portugal and Slovenia more time to bring their deficits below the European Union ceiling of 3 percent of annual economic output. That means they will be allowed to stretch out spending cuts over a longer time as they try to fight record unemployment and recession.
The Netherlands and Portugal are now granted one additional year, whereas France, Spain, Poland and Slovenia are granted two additional years each.
Some critics, however, insisted the commission’s softening of austerity wasn’t enough to kick-start growth and fight unemployment.
“Today’s report amounts to a confession of grave mistakes,” said Hannes Swoboda, leader of the European Parliament’s center-left caucus. “The European commission is at last facing reality but is still refusing to draw the logical conclusions and change its course,” he added, calling for the budget trimming to be stretched out over 10 to 15 years instead.
Europe is stuck in a recession that has led to a debate over the merits of austerity as a way to solve the region’s economic problems.
With rising unemployment, there is a growing consensus that governments must shift their policies toward fostering growth to end the downward economic spiral, even in countries such as Germany that have long insisted on rigorous fiscal policies.
The new measures do not mean that Europe has abandoned its message of austerity and strict budgetary discipline. Bailed-out Greece,Ireland, Portugal and Cyprus still have harsh deficit targets they have to meet to continue getting bailout loans.
Barroso rejected suggestions that the commission bowed to political pressure and switched focus away from austerity.
Singling out France, the 17-nation eurozone’s second largest economy, as an example of how the European Union is still keeping an eye on its members’ economies, Barroso said, “This extra time should be used wisely to address France’s failing competitiveness.”
In its recommendations, the commission urged France to cut red tape, implement pension and labor-market changes and strengthen competition in the services and energy sectors.
“French companies’ market shares have experienced worrying erosion in the last decade - in fact, beyond the last decade, we can say the last 20 years,” Barroso said.
Spain, the eurozone’s fourth-largest economy, with an unemployment rate of 27 percent, now has until 2016 to bring its deficit under control. It is set to drop from 6.5 percent of GDP this year to 2.8 percent then.
To achieve this, the commission said, the Spanish government must scrutinize spending programs, push ahead with labor-market changes, revise the tax system, reduce costs in the health sector and complete pending bank recapitalizations.
The commission’s recommendations will become legally binding and shape the countries’ fiscal policies once approved by the European Union’s leaders, who will discuss them at their summit next month.
Some countries were also dropped off the commission’s list of nations whose budgets are under increased surveillance because of an excessive deficit. They include Italy, Latvia, Hungary, Lithuania and Romania.
The most important of these decisions was on Italy, the eurozone’s third-largest economy, where the commission expects this year’s deficit to come in at 2.9 percent and then 1.8 percent in 2014. However, the experts in Brussels gave the new government in Rome a long list of measures to take, including labor-market changes and an overhaul of the tax system.
The European Union’s top economic official, Olli Rehn, insisted Italy still had little leeway to go on a spending binge or lower taxes. “Italy has a very low safety margin to keep the budget under the limit,” he said.
Business, Pages 25 on 05/30/2013