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Last updated: April 21, 2013 1:52 pm
Flaws found last week in an academic treatise on the effect of high public debt on economic growth have heaped pressure on governments to relax austerity, above all in crisis-stricken Europe, long seen as an incubator for austerity-driven policies.
But even before the arguments among economists over the merits of expansionary fiscal contraction reached a new pitch, policy makers in the eurozone had begun to ease up – with the tacit approval of disciplinarian Germany.
As many as six eurozone countries have received or are seeking waivers on tough EU-mandated deficit targets when they come up for review next month, a move that has thus far met little objection from Berlin – an unexpected acquiescence that has led many to believe the anti-austerity camp is suddenly in ascendance in Brussels, at least for now.
“The speed of consolidation is certainly going to be lower now,” said Guntram Wolff, an economist at the influential Brussels-based think-tank Bruegel. “The European Commission has agreed on that already.”
Olli Rehn, the commission’s top economic official, has frequently cited the central finding of the now-disputed study – co-authored by Harvard economists Carmen Reinhart and Kenneth Rogoff – that economic growth falls drastically in countries when sovereign debt rises above 90 per cent of gross domestic product.
In an interview, Mr Rehn – who is responsible for deciding whether eurozone countries will be allowed to miss their deficit targets – said that while he has “cited this study in the past as illustrative”, he insisted that his office does not set its policy on “any single piece of research”.
“We design our policies on the basis of a holistic assessment drawing on a wealth of studies – but also of course on our own analyses,” Mr Rehn said.
Indeed, Mr Rehn himself has frequently been in the vanguard of EU officials insisting that blindly sticking to headline deficit targets is counter-productive, arguing instead that countries should be judged more on reform programmes to liberalise their economies.
Mr Rehn’s push, which has backing of the International Monetary Fund, has already gained traction in bailout countries, where Greece has been given two more years to reduce its deficit below the EU-mandated 3 per cent of GDP and Portugal last month was granted a second year’s leniency.
Elsewhere in the eurozone periphery, Spain was given a pass this year and is expected to get a further waiver in May. And Italy, where nervous markets are watching the political turmoil closely, was given the green light to spend an extra €40bn in unpaid government bills despite the risk of breaching its 3 per cent barrier.
But the weakening economic picture is also wreaking havoc on “core” eurozone countries, with both France and the Netherlands publicly acknowledging they, too, will miss their 3 per cent targets this year.
Such leniency has been resisted by senior German central bankers, but it has been met with resignation by the German government, which instead has signalled it will mount more resistance in 2014, after this year’s national election. Chancellor Angela Merkel last week sought to play down the issue, saying France’s impending breach was “not new” to her, telling reporters she would leave it up to Mr Rehn to decide.
Instead, she insisted Paris had to present measures to keep its deficit in line with EU rules next year – a clear sign Berlin would accept a 3.7 per cent French deficit this year but would put pressure on Paris to deepen economic reforms.
“It would be good for France to start structural reforms immediately because the positive impacts of reforms take time”, Michael Meister, the financial affairs spokesman for Ms Merkel’s Christian Democrats in the Bundestag, told the Financial Times.
Wolfgang Schäuble, the German finance minister, backed last year’s easing in Spain, Portugal and Greece, and government officials said he would not risk a big fight with France as long as the eurozone remained economically fragile.
In a further sign of growing acceptance in Berlin, during Thursday’s Bundestag debate over the €10bn Cypriot bailout – which the German parliament passed overwhelmingly – Mr Schäuble took the unusual step of expressing concern for the economic upheaval in the eurozone’s periphery.
“The people in Greece, Spain, Italy, Portugal and now Cyprus are living in hard times,” he said, before adding: “They have to suffer during the reforms to have the chance of a better future.” Ms Merkel has struck a similar position in recent interviews, telling Bild newspaper that southern Europe “more or less have started the reforms they need”.
It could be a difficult balance for Ms Merkel to strike in an election year. Even as she shows empathy with the economic difficulties of southern eurozone countries, she cannot be seen to ally herself with French President François Hollande’s increasingly vocal crusade against austerity.
“There is nowadays much talk about austerity”, Ms Merkel told reporters last week. While the Reinhart-Rogoff findings may be in doubt, Ms Merkel said she felt debt in the eurozone was still too high. “That is of course not good in the long run”.
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