A turn from austerity

 

The European Commission’s decision to allow some member-states more time to meet their budget deficit targets is an overdue and welcome policy shift, a move away from a singular preoccupation with austerity and towards a new emphasis on growth.

A month ago, commission president Jose Manuel Barroso acknowledged the need for change, accepting that the political limits of austerity driven policies may have been reached. Euro zone economies have experienced six successive quarters of declining activity,however, economic recovery is not yet in sight. Unemployment has risen to over 12 per cent while youth unemployment has soared, creating new fears of a jobless generation, unless the EU acts quickly to stop it. Next month, Germany hosts a special ministerial summit on youth unemployment, where a new initiative is likely to be taken.

Overall, the European Union’s austerity efforts have disappointed: neither expediting economic recovery nor greatly bolstering the public finances of many member-states. In addition, public support for fiscal rectitude, via tax rises and spending cuts, has declined over time, both for the measures themselves and – as electoral results have shown – for the governments that introduced them.

Nevertheless while the commission’s modest initiative is welcome, it has been slow to recognise the bleak economic landscape that Europe now occupies. The commission’s belated U-turn on austerity, which involves a shift of emphasis -slowing the pace of fiscal consolidation in some countries while encouraging growth initiatives – offers some hope. Major economies – France and Spain – have been given a further two years to meet the 3 per cent budget deficit deadline, in return for agreeing to introduce economic reforms. However, French president Francois Hollande has already rejected any conditionality attaching to the time concession on the deficit, insisting the commission cannot “dictate” policy terms to France.

The EU’s singular concern for fiscal discipline at all costs, which required all 27 member states to deflate their economies in the midst of a recession, has made little economic sense. Some member states, notably Germany – the only euro zone member with a budget surplus last year – were well placed to expand their economies, by boosting demand for imports to the benefit of weaker peripheral economies, like Ireland. That would have helped to lighten the impact of austerity, in circumstances where Ireland’s high public debt and deficit and the terms of the bailout programme, have made fiscal consolidation a primary imperative.

The commission in assessing Ireland’s reform programme presents a mixed review: although critical of Government delays in carrying out reforms, it emphasises that while the EU as a whole is experiencing stagnant or negative growth “the Irish economy continues to expand at a moderate pace and economic growth is becoming more broad based”. That, and a rise in the numbers employed – for the third successive quarter – offers some encouragement as the State prepares to exit the bailout programme later this year.