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EU eases pace of austerity to help economy

Wednesday - 5/29/2013, 3:26pm  ET

European Commission President Jose Manuel Barroso gestures while speaking during a media conference at EU headquarters in Brussels on Wednesday, May 29, 2013. The European Union announced Wednesday to grant France, Spain and four other member states more time to bring their budget deficits under control to support the bloc’s shrinking economy. (AP Photo/Virginia Mayo)

JUERGEN BAETZ
Associated Press

BRUSSELS (AP) -- The European Union softened its demands for austerity Wednesday when it gave France, Spain and four other member states more time to bring their deficit levels under control so that they can support their ailing economies.

The EU Commission, the 27-nation bloc's executive arm, said the countries must instead overhaul their labor markets and implement fundamental reforms to make their economies more competitive.

Issuing a series of country-specific policy recommendations in Brussels, Commission President Jose Manuel Barroso said that the pace of reform needed to be stepped up across the EU to kick-start growth and fight record unemployment.

"We need to reform, and reform now. The cost of inaction will be very high," Barroso said. "There is no room for complacency."

After Europe's crisis over too much debt broke in late 2009, the region's governments slashed spending and raised taxes as a way of controlling their deficits -- the level of government debt as a proportion of the country's economic output.

But austerity has also inflicted severe economic pain.

Slashing spending and raising taxes have proved to be less effective at reducing deficits than initially thought. As economies shrink, so do their tax revenues, making it harder to close those budget gaps.

Besides France and Spain, the Commission is also granting the Netherlands, Poland, Portugal and Slovenia more time to bring their deficits below the EU ceiling of 3 percent of annual economic output. That means they will be allowed to stretch out spending cuts over a longer time as they try to fight record unemployment and recession.

The Netherlands and Portugal are now granted one additional year, whereas France, Spain, Poland and Slovenia are granted two additional years each.

Some critics, however, insisted the Commission's softening of austerity wasn't enough to kick-start growth and fight unemployment.

"Today's report amounts to a confession of grave mistakes," said Hannes Swoboda, leader of the European Parliament's center-left caucus. "The European Commission is at last facing reality but is still refusing to draw the logical conclusions and change its course," he added, calling for the budget trimming to be stretched out over 10 to 15 years instead.

Europe is stuck in a recession that has led to an increasingly bitter debate over the merits of austerity as a way to solve the region's economic problems.

With rising unemployment, there is a growing consensus that governments must shift their policies toward fostering growth to end the downward economic spiral, even in countries like Germany that have long insisted vehemently on rigorous fiscal policies.

The new measures, however, do not mean that Europe has abandoned its message of austerity and strict budgetary discipline altogether. Moreover, bailed-out Greece, Ireland, Portugal and Cyprus still have harsh deficit targets they have to meet to continue getting bailout loans.

Barroso rejected suggestions that the Commission bowed to political pressure and switched focus away from austerity.

Singling out France, the 17-nation eurozone's second-largest economy, as an example of how the EU is still keeping an eye on its members' economies, Barroso said that "this extra time should be used wisely to address France's failing competitiveness," he added.

In its recommendations, the Commission urged France to cut red tape, implement pension and labor market reforms, and strengthen competition in the services and energy sectors.

"French companies' market shares have experienced worrying erosion in the last decade -- in fact beyond the last decade, we can say the last 20 years," Barroso stressed.

Spain, the eurozone's fourth-largest economy, with an unemployment rate of 27 percent, now has until 2016 to bring its deficit under control. It is set to drop from 6.5 percent of GDP this year to 2.8 percent then.

To achieve this, the Commission says Madrid must scrutinize spending programs, push ahead with labor market reform, revise the tax system, reduce costs in the health sector and complete pending bank recapitalizations.

The Commission's recommendations will become legally binding and shape the countries' fiscal policies once approved by the EU's leaders, who will discuss them at their summit next month.

Some countries were also dropped off the Commission's list of nations whose budgets are under increased surveillance because of an excessive deficit. They include Italy, Latvia, Hungary, Lithuania and Romania.

The most important of these decisions was on Italy, the eurozone's third-largest economy, where the Commission expects this year's deficit to come in at 2.9 percent and then 1.8 percent in 2014. However, the experts in Brussels gave the new government in Rome a long list of measures to take, including labor market reforms and an overhaul of the tax system.

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