Europe’s slow dawn

Back in December 2011 I stated that I thought the Eurozone had about 2 years of worsening economic data ahead of it before the situation became so bad that the zone would be forced to back away from the fiscal treaties they had just signed themselves up to. Slowly but surely that appears to be happening as FT reports:

Brussels will on Wednesday give its clearest signal yet that it is moving away from a crisis response based on austerity, allowing three of the EU’s five largest economies to overshoot budget deficit limits and pushing instead for broader reform.

In its annual verdict on national budgets of all 27 EU members France, Spain and the Netherlands will be given a waiver on the annual 3 per cent deficit limit. Brussels will also free Italy from intensive fiscal monitoring despite its new prime minister’s decision to reverse a series of tax increases imposed by his predecessor.

The European Commission will make these moves on the condition that national governments embark on stalled labour market reforms. Brussels believes the delay in implementing them has contributed to the region’s unemployment crisis. “There are limits to what can be achieved with austerity,” said Maarten Verway, a senior European Commission economist.

Commission officials insist they are not abandoning “fiscal discipline” altogether, noting that even France and Spain, which will receive two-year extensions to their deficit deadlines, will still have to take stringent measures to get ballooning budgets back under control.
In addition, Brussels is expected to criticise several governments for their slow pace of reform and will demand immediate action by several it believes are at risk of prolonged economic stagnation. These include France, where senior officials in Brussels and Berlin believe time is running out for sufficient labour and economic reforms.

In the lead-up to the September election in Germany you could easily see this as a political stunt to lessen the sting that Angela Merkel’s party could receive from any ‘austerity’ backlash, but the words come with action:

Wolfgang Schäuble sounded almost like a new convert extolling the wonders of heaven as he raved about his latest conclusions on the subject of saving the euro. “We need more investment, and we need more programs,” the German finance minister announced after a meeting with Vitor Gaspar, his Portuguese counterpart.

Germany’s state-owned development bank Kreditanstalt fuer Wiederaufbau (KfW) will provide Spanish enterprises with cheap loans to help them boost employment.

Created in 1948 to administer the Marshall Plan funds for German post-war reconstruction, KfW is expected to earmark €800 million to €1 billion for Spain, according to a German official.

The money will go to KfW’s counterpart in Spain – Instituto de Credito Oficial (ICO) – which is in turn meant to give cheap loans to small and medium enterprises in Spain, which are currently being choked by high interest rates from local banks.

The plan needs the approval of the Bundestag’s budget committee, with a hearing with finance minister Wolfgang Schaeuble scheduled for next week.

Schaeuble earlier this month criticised the European Commission for moving too slowly on youth unemployment in Spain, Portugal and Greece and promised to set up bilateral schemes.

Personally, on top of cheap loans, I would also like to see further counter-balancing wage inflation in Germany to allow the competitiveness gap to close a little quicker, but that is probably a bit much to ask at this stage. As Edward Harrison at Credit Write-downs noted last week Germany is already accepting higher inflation targets and removing some of the restraints on wage appreciation that were a major component of domestic policy over the last decade ( you can read more here about how German domestic policy was a key factor in the crisis).

All up it’s an interesting development and in line with my predictions that the Eurozone will be forced to change course as the economic realities of the failed initial policy stance became apparent. We’ll have to wait to see what occurs after the German election to get an idea of exactly what 2014 brings to the zone, but this is certainly a positive step forward… finally.


  1. I wouldn’t expect a US/Japanese-style approach though DE.

    Loosening the rope, giving it a bit of slack… yes.
    Letting go and flooding the economy with printed money and stimulus? … not likely. It’s a cultural thing.

    I think this is more about realising that a blanket approach isn’t working.

  2. I don’t think anything will change in europe, just a couple of decades of scraping the bottom, and then we’ll see. These guys are painted in a corner by their own propaganda, they have made science and literature out of it, they’ve almost believed it, now they cant just ignore it and act against it. Deficits and printing are DE EVIL, end of story.

  3. “moving away from a crisis response based on austerity”

    Oh FT, what a crock.

    “The Austerity Paradox: I See Austerity Everywhere, But Not in the Statistics”

    “one finds little empirical evidence that the governments there have de facto reduced their total public expenditures.”

    “…..This contradicts the official interpretation that austerity is the primary source for the current high unemployment and recession in these countries. “