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European leaders change views on austerity
Three and a half years into its government-debt crisis, there are signs that Europe is adopting a gentler approach toward austerity. Political leaders aren’t backing away aggressively from budget cuts and higher taxes, but they are increasingly trying to temper these policies, which have stifled growth and made it harder for many countries to bring their deficits under control.
The European Union is slowing its enforcement of deficit limits until the region’s economy turns around; countries that were bailed out by their European neighbours are being given more time to repay loans, easing the pressure to cut budgets further; and financial leaders, including the head of the European Central Bank, say it’s time to place more emphasis on reviving growth.
“There has clearly been a shift in thinking,” says Christian Schulz, economist at Berenberg Bank in London. After the crisis broke out in late 2009, governments dramatically slashed spending—either to meet conditions for bailout loans, or to reassure jittery bond markets that they were trustworthy borrowers. This fiscal belt-tightening was introduced to help countries reduce their deficits and pave the way for critical financial aid.
Promises of austerity gave the ECB political breathing room to get more aggressive. The bank’s pledge last summer to buy unlimited amounts of government bonds is largely responsible for taming Europe’s financial crisis.
But austerity also inflicted severe economic pain in places like Greece, Ireland, Portugal, Spain and Italy. Over time—as the economy of the 17 European Union countries that use the euro descended into recession—evidence grew that slashing spending and raising taxes were less effective at reducing deficits than initially thought, and perhaps counter-productive. Why? Because as economies shrink, so do tax revenues, making it harder to close budget gaps.
The latest eurozone recession, which began last year, is forecast to end in the second half of this year and was the main focus of Thursday’s summit of European Union leaders in Brussels. With unemployment at a record 11.9 per cent and Europeans expressing their discontent at the polls and in the streets, many of the region’s political and financial leaders are willing to postpone budget-cutting and deficit targets.
“We could really use a break,” Mendes of Lisbon, a 26-year-old flight attendant said. “I don’t know why they’re doing this to us. It doesn’t make sense, it’s just killing our economy,” she said of the EU’s austerity demands imposed as part of the country’s 2010 bailout.
Advocates of austerity haven’t disappeared from the scene. Key leaders such as Germany’s Chancellor Angela Merkel still espouse the virtues of balanced budgets.
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