Barroso Urges Europe to Keep Cutting Debt

http://www.nytimes.com/2013/03/12/business/global/barroso-urges-eu-to-keep-cutting-debt.html

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BRUSSELS — The president of the European Commission on Monday called on E.U. leaders to stay the course on debt reduction and economic overhauls, as he sought to head off a rancorous debate on those issues when the leaders hold a summit meeting here this week.

“Steadfast implementation of reforms is beginning to deliver results in terms of current accounts and regaining competitiveness,” the commission president, José Manuel Barroso, wrote in a letter to the leaders of the 27 members of the Union.

He sent the letter accompanied by charts that showed Ireland and Portugal as having benefited from rigorous turnaround programs, but that also showed countries including France, Italy, Belgium and Hungary as still plagued by high labor costs, compared with their trading partners.

He urged the European Union nations to remain wary of uneven economic performances across the bloc, lest the region continue to struggle with the imbalances that have contributed to Europe’s debt and economic crisis.

“When we look at productivity performance, we see that the very best member states are twice as productive as the lowest performers,” wrote Mr. Barroso, who as president of the commission is the top official in the administrative arm of the Union.

Mr. Barroso appeared to be delivering leaders a stark reminder that the problems that led to sovereign bailouts for Greece, Portugal and Ireland were still a cause for concern.

Mr. Barroso and colleagues like Olli Rehn, the E.U. commissioner for economic and monetary affairs, have been under a blistering assault from critics who say that enforcing strict budgetary targets to pay down debt and preserve the euro is creating a vicious cycle of low or no growth.

Mr. Barroso’s letter was evidently a response to such critics. He said that structural overhauls were contributing to a rebalancing of the E.U. economy, particularly where governments had undertaken the measures as part of their bailout agreements.

Ireland and Portugal had reversed trends in terms of their unit labor costs, which were now more favorable than before compared to their trading partners, according to the charts that accompanied Mr. Barroso’s letter. By contrast, according to the charts, unit labor costs in countries like France and Italy still were higher compared to those of their trading partners.

He also warned that a number of “states still need to invest more in structural reform to turn around their relative loss of competitiveness over several years.”

Mr. Barroso did acknowledge that there were deep and painful problems in pockets of the bloc, in particular in countries plagued by youth unemployment, and indicated that he would call for continued financial support to help address joblessness when he addressed E.U. leaders on Thursday evening.

The leaders will gather for what is essentially a check-in on the tougher budgetary surveillance they agreed upon over the last two years to combat the kinds of extreme debt and deficit problems in many countries that nearly brought down the euro currency union.

During the meeting Mr. Barroso is expected to show that the commission is willing to be flexible, by proposing that a number of states be given more time to meet their budgetary targets because of the lingering difficulties in the European economy.

Commission officials are prepared to recommend that Portugal, for example, be given one more year to meet its budget targets. And they say deadlines for meeting targets also could be extended in the cases of France and Spain, on condition that their governments could demonstrate progress in adopting fiscal overhauls.

The austerity debate could nonetheless produce friction at the summit meeting if, as expected, E.U. officials and Germany continue to emphasize regional financial consolidation, while the French, Italians and Spaniards continue to put far more emphasis on achieving economic growth.

President François Hollande of France is expected to lead the pro-growth faction, supported by the leaders of two big and struggling countries in Southern Europe: Mariano Rajoy of Spain and Mario Monti, who will represent Italy at the meeting despite having lost out in recent elections.

“It would not be a surprise if Hollande and Monti look to provoke a discussion on austerity and ask, How do we return the euro zone to the path to growth?” said an E.U. official who requested anonymity because of the sensitivity of the summit meeting discussions.

But with elections due in September in Germany, many analysts now see limited room for Berlin to alter its current course as the bloc’s chief financial disciplinarian.

Another focal point of the meeting is likely to be Cyprus. On Thursday night, leaders of the 17 euro zone countries are expected to hold a separate meeting to seek ways to unblock an impasse over a bailout for Cyprus.

E.U. officials said those finance ministers would be prepared to meet again as soon as Friday to complete a deal for Cyprus. But that would require unusually rapid progress in the talks by the Cypriot authorities with negotiators from the so-called troika — the European Commission, the European Central Bank and the International Monetary Fund.

Cyprus needs about €17 billion, or $22.1 billion, in aid, of which up to €10 billion is needed to shore up the banking sector. That is a small fraction of what has been pledged to Greece, but is a colossal sum for Cyprus, which has a gross domestic product of only about €18 billion.

The scale of the country’s needs has prompted concern about how it could ever pay the money back. There are also acute concerns that Cyprus is a haven for money laundering.

Another hugely contentious issue is whether lenders like the I.M.F. will force Cypriot bank depositors to take losses in order to make the country’s debt more manageable.

The Cypriot authorities have repeatedly pushed back against such terms, saying the primary reason their banking system took a body blow was because they had to write down their holdings of Greek government debt as part of that country’s second bailout.

Cypriot hostility to a so-called haircut for depositors also has prompted speculation that the government in Nicosia is planning to ask the Greek government for €2 billion from its €48 billion bank recapitalization program to support Cypriot lenders.

On Monday, Nicos Anastasiades, the Cypriot president, said at a joint news conference with the Greek prime minister, Antonis Samaras, that Cyprus was seeking closer cooperation with Greece.

Mr. Anastasiades was not asked whether his country was looking for financial aid from Greece. But E.U. officials said such an approach would be legally dubious because money loaned to Greece under its bailout programs was given for highly specific purposes.

European officials also said it was hard to imagine that cash-strapped Greece would be able to make such a large sum available even if it wanted to.

In a sign of mounting skepticism in Cyprus about the troika’s terms, an outspoken church leader, Archbishop Chrysostomos II, on Sunday urged the new government in Nicosia to stand up to foreign lenders.

Cyprus should “say goodbye to the euro” before it concedes to harsh austerity, the archbishop said. He holds considerable sway in Cypriot politics, and his endorsement of Mr. Anastasiades during the presidential runoff last month is widely seen as helping propel the center-right leader to victory.

<em>Stephen Castle reported from London and Niki Kitsantonis from Athens.</em>

<NYT_CORRECTION_BOTTOM> <p>This article has been revised to reflect the following correction:

Correction: March 12, 2013

<p>A capsule summary with an earlier version of this article misstated the number of countries in the European Union. It is 27, not 17.