Given protracted and deep recessions in the southern states, which have been reinforced by spending cuts and tax rises, the eurozone seems to be reconsidering its austerity agenda.
The EU has given several states one or two more years to bring their annual budget deficits down to 3% of GDP. The European Commission’s president, José Manuel Barroso, has suggested that the austerity policy had “reached its limits”. A French minister has openly criticised the “failing” austerity policies imposed by Germany and “a few northern countries”.
But while rhetoric may soften and some deadlines may be extended, a major U-turn on austerity seems unlikely. A German minister promptly rebuked Barroso, and German politicians will want to stay tough on the indebted states before national elections in September. But even if austerity ended tomorrow, Europe’s problems would hardly be over.
A key reason so many of Europe’s economies are suffering, says Hugo Dixon on Breakingviews, is that they had become “flabby and uncompetitive”. And the structural reforms required to fix this have only been tentatively addressed.
Outgoing Italian premier Mario Monti reformed pensions, but did little to liberalise services markets and “botched his shake-up of the labour market”. Greece has slashed spending but failed to tackle tax evasion or vested interests in business. France’s labour practices remain “too rigid”. There is still much to do before Europe can expect to return to “sustained growth”.