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E.U. Proposes Giving Countries Time to Cut Deficits E.U. States Win Leeway on Deficits
(about 4 hours later)
BRUSSELS — The European Union on Wednesday marked a new stage in the easing of Europe’s austerity drive by recommending that France, Spain and several other countries be given more time to bring their budget deficits down to or below 3 percent of gross domestic product, the target specified by E.U. rules. BRUSSELS — Retreating slowly from tough austerity policies that have been widely blamed for leaving 27 million Europeans out of work, the European Union’s executive arm said Wednesday it would allow France, Spain and five other nations more time to meet mandatory budget deficit targets.
The proposals by the European Commission, the E.U. executive, as part of its annual budget review would allow governments more time to enact spending cuts and other measures to rein in their budgets, in exchange for making structural changes aimed at reviving growth. But the Brussels-based European Commission also cautioned against the temptations of debt-fueled economic stimulus, stressing in its annual review of economic policy recommendations that Europe instead needs to dismantle rigid labor regulations and remove other “structural” obstacles to growth.
“We now have the space to slow down the pace of consolidation depending on the situation in each country,” José Manuel Barroso, the commission’s president, said at a news conference on Wednesday afternoon. The mixed message marked Europe’s latest response to an economic crisis that has led to six consecutive quarters of negative growth, left even previously robust northern economies battling recession and pushed overall unemployment to nearly 12 percent and to more than twice that in Spain and Greece.
But the extensions immediately raised concern among analysts, who said that countries might use them as an excuse to relax their efforts at structural overhauls. “The fact that more than 120 million people are at risk of poverty or social exclusion is a real worry,” said José Manuel Barroso, the president of the European Commission, at a news conference. “There is no room for complacency,” he said, describing the situation in some countries as a “social emergency.”
“Countries are going to interpret these recommendations in self-serving ways,” said Mujtaba Rahman, the director for Europe at the Eurasia Group. “The commission argues its rules are being applied intelligently, but countries such as France will use this to argue they have prevailed on Europe to end austerity, and that doesn’t bode well for the actual implementation of the tougher aspects of these policy measures.” Addressing concerns that Europe has pushed too hard for spending cuts, Mr. Barroso — using an economists’ euphemism for austerity — said “we now have the space to slow down the pace of consolidation.” But he also warned that “growth fueled by public and private debt is not sustainable.” This, he added, is “artificial growth.”
As the European economy falters and unemployment skyrockets in many countries, champions of fiscal rigor at the commission have faced intense pressure to ease up on unpopular remedies and find some way to restore growth to the world’s largest economic bloc. He complained that a bitter policy debate that has often cast austerity as the enemy of growth “has been to a large extent futile and even counterproductive.”
Rather than cutting spending, the latest European recommendations favor stimulating economies through measures like opening up closed professions and injecting more competition to large sectors like utilities and transportation. Five year after the global financial crisis swept in from the United States, most European countries, with the notable exception of Germany, are still stuck in economic doldrums and show scant sign of even the modest recovery achieved by the United States and Japan, which have both opted for more government-funded stimulus than Europe.
Even so, national leaders should avoid “the debate about austerity versus growth'’ that ‘'has been to a large extent futile and even counterproductive,” Mr. Barroso said. This dismal record has put champions of fiscal rigor at the European Commission under intense pressure to back off unpopular budget cuts and instead follow the prescriptions of John Maynard Keynes, the late British economist who urged that government spending be ramped up in times of crisis.
“Instead of fueling these debates that are divisive and can only undermine confidence, our capitals should focus on promoting European consensus” and on “more determined and urgent action on growth-enhancing reforms” as well as on youth unemployment, he said. The policy recommendations announced Wednesday in Brussels don’t suggest any U-turn in policy but they do confirm a slow but steady shift away from swiftly limiting deficit spending. Olli Rehn, the commission’s senior economic policy maker, announced that seven countries would be given more time to reach a deficit target of 3 percent of gross domestic product.
France, Spain, Poland and Slovenia will each have an additional two years to bring their deficits down, the commission said. The Netherlands and Portugal will have an additional year. France, Poland, Slovenia and Spain, he said, will be given an extra two years, while Belgium, the Netherlands and Portugal will each get an extra year.
The economic outlook remains dire in Europe, with gross domestic product expected to shrink 0.1 percent this year across the 27-nation Union and 0.4 percent in the 17-nation euro area, the commission said earlier this month. Mr. Rehn said that Europe still needs “fiscal consolidation” in the long-run but added that its pace this year would be “half what it was last year and to some extent it will be slowed further.” The decision to give France more time, he said, was based on expectations that its socialist president, François Hollande, would push through long-stalled reforms to cut the cost of hiring workers and boost the country’s flagging competitiveness. A key part of this, Mr. Rehn said, is pension reform.
France’s Socialist president, François Hollande, has been among those most in favor of easing austerity policies. His government was supposed to get its budget deficit below 3 percent of G.D.P. by this year. Instead, it is on track to hit 3.9 percent. Mr. Hollande responded angrily to the commission’s proposals, particularly those concerning the pension system. “The European Commission cannot dictate to us what we have to do,” French media quoted the president as saying. Mr. Hollande insisted that the shape of any pension reform, a highly contentious issue in France, “is up to us, and to us alone.”
Yet the granting of extra time “was not a proposal of France,” Mr. Barroso said, but a decision backed by “sound technical analysis.” France also needs to address steadily eroding competitiveness, he said. France’s legislature earlier this month enacted a modest trim of labor regulations but Mr. Hollande, under fire from within his own party and deeply unpopular with the public at large, faces an uphill struggle to implement reforms that, when attempted by his predecessors, led to large street protests and labor unrest.
France, along with some other E.U. member states, has resisted sweeping changes to labor laws and other measures that would loosen up the economy, so that will raise questions about whether some countries will be able to make the changes needed to fulfill the recommendations. The extension granted to France and others immediately raised eyebrows among some analysts, who said these countries might use them as an excuse to relax their reform efforts. “Countries are going to interpret these recommendations in self-serving ways,” said Mujtaba Rahman, the director for Europe for the Eurasia Group, a research group. “The commission argues its rules are being applied intelligently, but countries such as France will use this to argue they have prevailed on Europe to end austerity.”
But Mr. Barroso insisted that the recommendations were “concrete, realistic and adapted to the situation of each” country. Wrangling over how to best address Europe’s crisis has created deep splits, dividing richer countries from poorer ones and triggering a widespread public backlash against the European Union and established political elites in individual countries. It has also divided policymakers in Brussels.
Spain was also supposed to hit the 3 percent deficit target this year, yet the latest predictions are that it will stand at 6.5 percent. In a remarks published Wednesday by German media, the energy commissioner, Gunther Oettinger, scoffed at assurances that France is working to get its economic house in order and said “too many in Europe still believe that everything will be fine.” France, he said, “is completely unprepared to do what’s necessary,” while Italy, Bulgaria and Romania “are essentially ungovernable.” The European Union, he added, “is ripe for an overhaul.”
The recommendations released on Wednesday are meant to influence how governments shape national budgets for next year and beyond. Mr. Barroso, the commission president, declined to comment on Mr. Oettinger’s remarks.
E.U. governments still must consider whether to endorse the recommendations at the next summit meeting of E.U. leaders on June 27 and 28.
If governments do endorse the recommendations, they will be legally enforceable by the European Commission. The commission, over the past two years, has acquired enforcement powers in budgetary matters, including the ability to impose fines for noncompliance, as part of efforts to address the root causes of the region’s sovereign debt crisis.
The rules are designed to dissuade countries from overshooting their budgets and dragging their heels on fixing economic imbalances like credit bubbles, persistent trade deficits and high debts.
The recommendations also reduce E.U. scrutiny over five other countries — Hungary, Romania, Latvia, Lithuania and Italy — that have reduced their deficits.
Malta, however, was added to the excessive deficit category.
Belgium was told that its effort so far to reduce its deficit had been insufficient, and was given just one year to improve its finances. The commission warned that “no effective action has been taken by Belgium to put an end to the excessive deficit.'’
Greece, Portugal, Ireland and Cyprus were not part of the country-specific reports released on Wednesday. As recipients of international bailouts, they are monitored under a separate, more intensive, process.

Andrew Higgins contributed reporting.

Andrew Higgins contributed reporting.