Buoyed by tentative signs of an economic turning point in most countries within the eurozone, the European Union leaders' summit which began overnight in Brussels is looking to switch the focus of policy to sustaining economic growth and creating jobs, and away from fiscal austerity and ill-considered government debt reduction.
There are many reasons behind this change in focus. There is the practical issue that, according to data prepared by the EU Commission, France and Spain are likely to miss their deficit reduction targets this year. Imposing additional budgetary austerity to meet these targets is untenable to the governments in these two countries with high and rising unemployment and the obvious political pain associated with such moves.
Ahead of the summit, French President Francios Hollande said that France’s public deficit would be around 3.7 per cent of GDP, somewhat short of the EU limit of 3 per cent. Italian Prime Minister Mario Monti joined the call for greater fiscal flexibility saying, “reasonable margins for flexibility have been introduced and we will ask to be able to avail ourselves of these margins”.
It seems that some much-needed balance is coming into the consideration of the trade-offs between fiscal austerity and deficit reduction on the one hand, and jobs and economic growth on the other.
Buoying the leaders to take a more constructive approach has been a slow build in optimism in European financial markets, which is spilling over to what increasingly looks to be a much needed economic recovery. This should be nurtured and then sustained to the extent it can by taking a less draconian approach to budget policy.
These green shoots for the eurozone were confirmed with the monthly bulletin of European Central Bank. The ECB’s latest forecasts were for a gradual recovery in GDP through the course of 2013 and into 2014. The ECB noted that while downside risks to the economic outlook remained, inflation would remain low and monetary policy would remain “accommodative”.
The economic backdrop to the tilting in the policy balance is five consecutive quarters where eurozone GDP growth has been either zero or negative and a record-high 11.8 per cent unemployment rate for the region as a whole and for Spain and Greece, the unemployment rate is above 25 per cent.
German Chancellor Angela Merkel who faces an election later this year, seems to be holding the pro-austerity line. She is resistant to the EU leaders changing focus away from budget cuts and repairing budgets because Germany, which has one of the strongest economies within the eurozone, is providing the bulk of the financial support that is helping the problem countries deal with the transition to lower deficits and in time, lower levels of government debt. Merkel clearly sees a financial risk to Germany if the countries being bailed out do not reduce their deficits in a timely manner.
Backing Merkel was German Economy Minister Phillipp Roesler who immodestly noted that “solid finances are essential. Thanks to this approach, Germany is the vanguard in Europe. Our success with a policy of growth oriented consolidation is the envy of the world.”
There is also the political reality that voters, confronting recession or depression, are unable or unwilling to tolerate further cuts to jobs and services. The recent election results in Italy, which saw voters flock to the anti-austerity advocates, and polls in other countries show an overwhelming view that the focus of economic policy should give greater weight to jobs and growth.
In a win for diplomacy and as he tried to cover the views of most leaders at the summit, European Council President Herman Van Rompuy said in his opening remarks that:
“We need to stay focused on the goal, the common goal. Our plan has four clear and consistent strands:
– Restoring financial stability – and maintaining it.
– Ensuring sound public finances – structurally sound.
– Fighting unemployment, especially for the young, today's emergency.
– Working on long-term growth, preparing for the future.
We need all four at the same time. The question is finding the right balance. We won't overcome a debt crisis with more debt. We won't create jobs if companies have no access to credit.”
The EU leaders summit was being held as news that the unemployment rate in Greece was 26 per cent in the December quarter, confirming the earlier monthly indicators that the depression remains. At the same time, Spanish retail sales were better than the market expected but were dismally weak coming in at -10.2 per cent for the year to January.
European stock markets remained bullish, with the broad European indices up around 1 to 1.5 per cent, reaching fresh four-and-a-half and five-year highs. Certainly the market is upbeat, which is to be welcomed. It just needs this optimism to flow through to the real economy and jobs. When this happens, the budgets will look after themselves.