Tuesday, April 23, 2013

Eurozone - Much ado about nothing?

Latest comments by EU policymakers have given rise to speculation about a possible u-turn of the Eurozone’s crisis strategy. The next weeks and months should bring an officially endorsed smoothing for fiscal policies but not a reversal.

Since the IMF meetings, the old discussion on growth versus austerity has flared up again. The obvious focus of interest in this discussion is the Eurozone. In the follow-up of the IMF meetings, latest comments by Commissioner Rehn and Commission President Barroso gave the impression that the Eurozone’s crisis management was about to change dramatically. Comments like “austerity is reaching its limits” were interpreted by many observers as a clear hint of a reversal of the current crisis-fighting strategy.

In our view, the bottom line of this discussion will probably be “much ado about nothing”. It is no coincidence that, yesterday, the European Commission published the verbatim minutes of Commission President Barroso’s comments on the austerity vs growth debate. A quick look behind the headlines shows that Barroso is not preparing a u-turn of the current austerity strategy. Comments like “growth based on unsustainable public or private debt is artificial growth” or “we need sound fiscal policy” are anything else but a disjuncture from current policies.

Barroso admitted the need for growth. However, Barroso stressed that growth should not come from new spending but through investment and structural reforms for competitiveness. In fact, contrary to what is often heard, structural reforms have been an important part of all bailout adjustment programmes so far. The prescribed adjustment medicine in the Eurozone goes already beyond one-dimensional fiscal austerity.

What will probably happen in the coming weeks and months is a flexible application of the existing fiscal rules. The Commission has already suggested on several occasions that it will focus more on structural deficits than on nominal deficits when assessing austerity measures in the individual countries. We have talked about this probable shift already back in February in our note "Watchdog finally unchained?" This shift should come in May and June, when first the European Commission presents its assessments of the individual countries’ budget plans, which are later discussed by European leaders. The EU Summit in June should bring the official endorsement of the more flexible approach.

The shift away from nominal targets to structural fiscal efforts is not a reversal of the current crisis policies but only a pragmatic shift to avoid a worsening of the negative interplay between austerity and growth. It will smoothen out the fiscal adjustment process. Nothing more and nothing less.

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