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Europe eases the austerity whip _ a little

Friday - 3/15/2013, 1:30pm  ET

Students march under the snow while they protest against austerity measures on state schools, in Pamplona, northern Spain on Thursday, March 14, 2013. (AP Photo/Alvaro Barrientos)

DAVID McHUGH

FRANKFURT, Germany (AP) -- 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 neighbors 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.

"We are all fully conscious of the debate, the mounting frustrations and even despair of people," said Herman Van Rompuy, president of the European Council, after the meeting ended.

"We also know there are no easy answers."

With unemployment at a record 11.9 percent 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.

A few recent examples:

-- EU officials have hinted Spain, France, Portugal and Greece might be allowed more time to reduce their deficits to within the limits specified by European Union rules.

-- European finance ministers last week agreed in principle to grant Ireland and Portugal more time to repay bailout loans to other eurozone countries. While the countries cannot abandon deficit-reduction plans they agreed to in return for loans, it does allow them to cut budgets more slowly.

-- ECB President Mario Draghi last week urged indebted governments to move beyond spending cuts and tax hikes and introduce labor reforms and other measures that would boost growth and reduce the "tragedy" of unemployment.

The rethinking of austerity gained momentum late last year after economists at the International Monetary Fund produced research that showed Europe's austerity policies had been far more damaging than policymakers thought.

It's hardly news to Ines Mendes of Lisbon, a 26-year-old flight attendant and mother of a 4-year-old. She said income tax hikes this year will cost her and her partner the equivalent of more than a month's pay each over the year, further squeezing her family budget.

"We could really use a break," Mendes 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.

"Budget consolidation, structural reforms and growth are not contradictions but require each other," Merkel told reporters after the summit of 27 EU countries on Thursday. "It is necessary to trim the deficits to promote growth and investment."

But there is a difference between the rhetoric and the actions these leaders endorse. Merkel's government agreed last year to the EU commission's recommendation to extend deficit-reduction deadlines for Portugal, Greece and Spain. And the EU commission is now judging countries based on their so-called structural deficit -- or what the deficit would be excluding the effects of the recession. That gives countries more time to get their finances under control.

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