BRUSSELS, Belgium — Germany on Tuesday defended the policy of tightening the budgets in a number of European countries despite a blunt warning from a top European Union official that the 27-nation bloc’s austerity drive “has reached its limits.”
“If we were to give up the policy of consolidating the budgets in Europe, if we were to fall back to the old policy of taking on new debt, then we would cement mass unemployment in Europe for many years to come,” German Foreign Minister Guido Westerwelle said Tuesday in Brussels.
His warning followed an admission from the head of the EU’s executive arm, Commission President Jose Manuel Barroso, that the austerity prescription of higher taxes and lower spending, though correct in principle, may have hit the limits of public acceptance and effectiveness amid rising unemployment and recession.
“Even if the policy of correction of the deficit is basically correct, we can always discuss the fine-tuning, the rhythm or the pace, but that will not be sustainable politically and socially,” Barroso said Monday, according to an official speech transcript. He added the deficit reduction “has to be complemented by a stronger emphasis on growth and growth measures in the shorter term.”
Many economists say cutting budgets while the economy is weak further hampers growth and deteriorates a country’s debt position, which is measured relative to its annual economic output.
Nations like Spain, Portugal or Greece face record unemployment and a sagging economy but need to rein in public spending to meet agreed deficit targets.
Still, they all saw their budget deficits swell in 2012 as their economies remained stuck in recession, according to official EU data released Monday.
Five nations in the 17 country-eurozone have had to seek international rescue loans from their European partners and the International Monetary Fund. With the exception of Ireland, all of them are struggling to implement the required austerity measures without choking the economy.
“So while this policy is fundamentally right, I think it has reached its limits in many aspects, because a policy to be successful not only has to be properly designed,” Barroso said.
“It has to have the minimum of political and social support.”
The EU Commission has a powerful role in designing Europe’s economic policies since it is a key actor in setting and enforcing the targets the countries have to meet in bringing their finances in order.
Barroso’s blunt comments were the strongest indication yet that countries struggling to meet their deficit targets — such as Spain, Portugal and France — will likely be granted more time, reducing the need for more immediate spending cuts.
Germany, Europe’s biggest economy, has kept spending flat and managed to run a budget surplus last year thanks to its more resilient, export-oriented economy. The country hopes to start trimming its debt load of about 80 per cent of GDP over the coming years.
German leaders are among Europe’s most vocal in urging others to show budget restraint, not least because the country is tired of paying for bailouts and national elections are due in September.
“One cannot buy growth with new debt,” Westerwelle insisted. “A policy of fiscal consolidation and growth are two sides of the same medal.”