EU eases hard line on austerity

Brussels will on Wednesday give its clearest signal yet that it is moving away from a crisis response based on austerity, allowing three of the EU’s five largest economies to overshoot budget deficit limits and pushing instead for broader reform.

In its annual verdict on national budgets of all 27 EU members France, Spain and the Netherlands will be given a waiver on the annual 3 per cent deficit limit. Brussels will also free Italy from intensive fiscal monitoring despite its new prime minister’s decision to reverse a series of tax increases imposed by his predecessor.

The European Commission will make these moves on the condition that national governments embark on stalled labour market reforms. Brussels believes the delay in implementing them has contributed to Europe’s unemployment crisis. “There are limits to what can be achieved with austerity,” said Maarten Verway, a senior European Commission economist.

Commission officials insist they are not abandoning “fiscal discipline” altogether, noting that even France and Spain, which will receive two-year extensions to their deficit deadlines, will still have to take stringent measures to get ballooning budgets back under control.

In addition, Brussels is expected to criticise several governments for their slow pace of reform and will demand immediate action by several it believes are at risk of prolonged economic stagnation. These include France, where senior officials in Brussels and Berlin believe time is running out for sufficient labour and economic reforms.

François Hollande, the French president, sought to show he was making unemployment in France and the rest of the EU a priority telling a meeting of European finance and labour ministers in Paris that they had to act “urgently” to help the region’s 6m jobless youths.

Mariano Rajoy, the Spanish prime minister, called on the EU to change its deficit procedure so countries would no longer be penalised for spending money on fighting youth unemployment.

“We have to rescue an entire generation of young people who are scared. We have the best-educated generation and we are putting them on hold. This is not acceptable,” said Enrico Giovannini, Italian labour minister.

German officials, however, are keeping a close eye on the recommendations by Olli Rehn, the EU’s economic chief, for Paris. Some officials believe Mr Rehn’s reform agenda for Paris may be more far-reaching than Mr Hollande will be willing to accept.

Mr Hollande is facing similar pressure at home. Christian Noyer, governor of the Bank of France, said on Tuesday the government would have to go further in pension and labour reforms, warning that Paris cannot rely only on increased taxes and must cut spending to close its fiscal gap.

“Over a certain threshold, which our country has probably crossed, any increase in public spending and debt has extremely negative effects on confidence,” Mr Noyer said in presenting his annual report on the French economy to Mr Hollande. “The old model doesn’t work any more” he said of traditional efforts to boost demand by encouraging spending.

He added that France had to move away from public policies “overly concerned with preserving the jobs of the past” and allow for liberalisation that could help future job creation.

Additional reporting by Michael Paterakis in Brussels and Hugh Carnegy in Paris