Europe Likely to Soften Further on Austerity, Push for Growth

Sunday, 28 Apr 2013 12:57 PM

 

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Europe may accelerate a shift away from its austerity-first agenda this week as the new Italian government changes course and a German-Spanish investment pact underscores a renewed focus on combating record unemployment.

Sunday’s swearing in of Italian Prime Minister Enrico Letta, in a ceremony marred by a shooting outside the premier’s office in central Rome, ends a political deadlock nine weeks after voters rejected the country’s budget-cutting course. Monday, German Finance Minister Wolfgang Schaeuble, a champion of austerity, will travel to Spain to unveil a plan aimed at spurring investment in Spanish companies.

“You have to react to economic developments — we do so in Germany,” Schaeuble told members of Chancellor Angela Merkel’s Christian Democratic Union in Berlin on Friday. “We are not bureaucratic; we are not stupid.”

The new Italian government’s pledges to dismantle parts of the budget-cutting project undertaken by ousted premier Mario Monti open a new front in the debate over the German-led policy of austerity to overcome the bloc’s debt crisis. As the 17- member euro area remains mired in recession, European leaders are joining global critics in urging the bloc to devote more resources to boosting economic growth.

Italian bonds strengthened for a fourth week last week, with 10-year yields dropping below 4 percent for the first time in almost 2 1/2 years. As the two-month political gridlock ended, speculation also arose that the European Central Bank may chip in by cutting interest rates at a meeting this week.

Italy Test

Letta of the Democratic Party, at 46 the third-youngest Italian leader since World War II, came into office after sealing an alliance with former premier Silvio Berlusconi and recasting the coalition that stood behind Monti.

One of the first tests of that partnership may be a property tax that three-time premier Berlusconi has vowed to eliminate. Berlusconi said Saturday that Letta had agreed to abolish the measure on first homes and reimburse last year’s payment, a move he said may cost about 8 billion euros ($10.4 billion). Letta has not confirmed the agreement, and his first Cabinet meeting Sunday didn’t address it, according to his office.

Scrapping the unpopular tax would mark a challenge to European leaders’ preference for fiscal belt tightening at a time when it has come under increased criticism for compounding economic distress. European Commission President Jose Barroso spurred a debate last week when he said that while consolidation is necessary, budget-cutting had run its course.

“We are reaching the limits of the current policies,” Barroso told an audience in Brussels on April 22.

While the comments drew ire from German lawmakers in Merkel’s coalition, Germany’s government said that Barroso’s position was in accord with Berlin and stressed that Europe must be flexible in how it responds to economic distress.

‘Yesterday’s Policy’

German Deputy Finance Minister Steffen Kampeter said last week that the bloc’s budget rules “aren’t rigid.”

Joachim Fels, co-global head of economics at Morgan Stanley in London, today cited “accumulating signs that austerity is yesterday’s policy, at least in Europe” as a signal of optimism about a global recovery in the second half.

Schaeuble offered the latest signal that Merkel’s government is adjusting its crisis stance in comments late last week. He said he’ll use Monday’s meeting in Madrid with Spanish Economy Minister Luis de Guindos to push for an investment program that sidesteps the EU Commission.

The plan, announced on the same day that Spanish Prime Minister Mariano Rajoy said he was seeking a two-year extension to meeting EU deficit rules, could serve as a model for other countries suffering with battered economies, Schaeuble said.

“If the economy deteriorates, you don’t reinforce the economic downturn through deeper cuts,” he said.

Record Jobless

The depth of Europe’s economic woes was on display last week. Unemployment in Spain rose to more than 27 percent in the first quarter, the highest since at least 1976, with more than 6 million people in the country out of work for the first time, the government in Madrid said April 25. Joblessness in the euro area as a whole stood at a record 12 percent in February.

The ECB may also pull its weight. The Frankfurt-based bank will lower its benchmark rate to a record 0.5 percent when central bankers meet on Thursday in Bratislava, according to the median of 69 economist estimates compiled by Bloomberg.

Still, as Merkel approaches national elections in less than five months, softening her stance on indebted nations in the euro area will pose a challenge. Last week she again defended scaling back budgets.

“We always talk a lot about growth in Europe, but we have to ask ourselves what we mean by that,” she told savings banks officials in a speech in the eastern city of Dresden on April 25. “Growth only on the basis of state financing won’t make us more competitive in Europe.”

© Copyright 2014 Bloomberg News. All rights reserved.

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