Rehn promises less austerity as economic outlook worsens

EU commissioner signals policy shift as G20 leaders assemble for Washington dinner

The euro zone will slow its budgetary belt-tightening to help reinvigorate economic growth, EU Economic and Monetary Affairs Commissioner Olli Rehn has said.

Mr Rehn's comments are being viewed by some as an admission that fiscal adjustments linked to the troika programmes in Europe are having a greater-than-expected impact on growth.

The pace of fiscal tightening around the globe is set to dominate talks by finance ministers and central bank governors from the Group of 20 advanced and emerging economies, who are meeting today in Washington.

Minister for Finance Michael Noonan is also attending as part of Ireland's Presidency of the European Union.

Among the topics up for debate is whether or not to set numerical targets for debt and deficit reduction beyond 2016.

But it appeared progress toward an agreement on a co-ordinated debt reduction plan to follow up on a 2010 agreement reached in Toronto would be hard to come by.

Mr Rehn said when markets started refusing loans to some euro zone countries at sustainable rates in 2010 for fear they would not be paid back, the euro zone had no other choice but to sharply cut borrowing and spending.

The combined euro zone budget deficit fell to 3.5 per cent of gross domestic product in 2012 from 4.2 per cent in 2011, pushing the 17 countries that share the euro into recession last year. This year, the deficit is set to shrink to 2.8 per cent, which would represent a more than halving of the euro zone budget shortfall from 6.3 and 6.2 per cent of GDP in 2009 and 2010, respectively.

"In the early phase of the crisis it was essential to restore the credibility of fiscal policy in Europe because that was fundamentally questioned by market forces," Mr Rehn said. "There was no choice. Decisive action was taken."

"Now, as we have restored the credibility in the short-term, that gives us the possibility of having a smoother path of fiscal adjustment in the medium-term," he said, noting the United States was now being more aggressive in its deficit cutting than Europe.

"I have been somewhat struck by the perception of the economic and fiscal policy in Europe," Mr Rehn said, pointing to the deficit reduction numbers as evidence Europe had already taken decisions to spread out its deficit cuts.

US treasury secretary Jack Lew said this week that a rush towards fiscal austerity in Europe had worsened the economic situation in some countries, and there was a need to assess the impact of budget cuts on growth and employment.

The United States has also resisted setting specific debt-reduction targets, saying the focus needs to be on lifting growth out of the doldrums.

Canadian finance minister Jim Flaherty agreed that more troubled economies should move more slowly towards balanced budgets than others. But he urged the G20 to set hard targets on debt and deficit, and warned the group could lose its credibility if it slackens its resolve.

"It's important for confidence by investors, which leads to more investment, economic growth and jobs," Mr Flaherty said.

One proposal put forth by Canada and India, co-chairs of a G20 working group, is to agree to cut public debt over the longer term to well below 90 per cent of GDP, according to a document obtained by Reuters.

Russia, which is hosting the G20 leaders summit in September, has said its goal is to reach a deal by then. Sergei Storchak, Russia's deputy finance minister, told reporters another possibility would be to let each nation set its own target with a singular goal: "the debt indicators must show an obvious downward trajectory."

Mr Rehn noted that the European Central Bank was buying euro zone governments time to get their finances in order with its unambiguous pledge to do whatever it takes to steer the region through its debt crisis.

"We structure efforts to put public finances in order more over time; it is rational policy making at the current juncture," Rehn said. "There is market confidence to do it now, like you see from the very successful Spanish bond auction today - with the best yields since 2010," he said.

Separately, Christine Lagarde, managing director of the International Monetary Fund, called for moving the world into a "full-speed recovery" at a news conference on Thursday at the opening of the fund's annual spring meetings with its sister institution, the World Bank.

Ms Lagarde, echoing an earlier warning, expressed concern about what she called a "three-speed" global economy, with developing nations growing rapidly, the United States healing faster than most other advanced industrial countries but Europe continuing to suffer from insufficient demand and incomplete government policies.

"It's not the healthiest recovery," Ms Lagarde said. But "we believe that we have avoided the worst, and the economic world no longer looks quite as dangerous as it did."

She added: "The pickup in financial conditions, financial markets, is clearly not translating into a sustained pickup in growth and jobs."