Europe's Austerity Era Could Be Coming to an End

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The tide is turning in Europe. Austerity, long seen as the most appropriate medicine for the continent's debt-wracked economies, is fast losing favor, with increasing concessions being offered by Europe's policymakers to countries over loan repayments and deficit reduction.

On Monday, Greece became the latest country to clinch a deal with the troika on a review of its austerity program.

(Read More: The Euro Zone Crisis Is Back—On Multiple Fronts)

"We have a deal," Greek Finance Minister Yannis Stournaras told reporters in Athens, Reuters reported.

Meanwhile, Spain has requested more time from the EU to reduce its fiscal deficit in line with European rules.

A government source told Reuters last week that the country would now increase its 2013 deficit target to 6 percent of gross domestic product (GDP) and is negotiating with the European Commission for more time to cut its fiscal gap to 3 percent of GDP, currently targeted for 2014.

The request comes after European officials agreed last week to allow Ireland and Portugal seven more years to pay back their bailout loans.

(Read More: EU Offers Crisis-Hit Members Wiggle Room on Deficits)

Spain's Finance Minister Luis de Guindos told CNBC over the weekend that fiscal consolidation and growth had to be "compatible."

"We have to try to make both elements compatible," de Guindos said. "This is something that has been started to be considered in all the European countries," he added, denying that fiscal reduction and pro-growth policies were mutually exclusive.

"We have to reduce the fiscal deficit to put order in public finance that creates confidence in the country and simultaneously [ensure that] the fiscal reduction path is compatible with other measures in order to foster near-term growth," he said.

Spain is expected to be asked to speed up its reform program in return for more time from the EU and the Spanish government will have to present its stability plan and reforms to the EU before the end of the month.

"The euro zone policymaking agenda of 2013 is not the one of 2011, or even of 2012 for that matter. Deficit sinners are being cut more fiscal slack; maturities of bail-out loans are being extended; and, most importantly, the crisis has spread to the core of the bloc, posing a challenge to the pro-austerity consensus," Nick Spiro, head of Spiro Sovereign Strategy, said in a note.

"Euro zone policymakers have been steeling themselves for further setbacks. Their actions over the last several months show the extent to which the austerity-focused agenda has been undermined and is being watered down for fear of it collapsing entirely," he added.

(Read More: Portugal Fires Warning Shot for Austerity in Europe)

"The euro zone remains stuck in a halfway house amid a standoff between a German-led group of states which refuse to share more risks and a French-led one wary of sharing more sovereignty," he said.

German Austerity Pullback?

Peer Steinbrueck, a former German finance minister who heads the center-left Social Democratic party, kicked off his campaign for the German leadership by telling CNBC that, if elected, he would change the measure of austerity-policies imposed on Europe.

"[Austerity policies] won't be replaced, [but] it is all about the dosage. At the moment, in countries like Greece, Portugal, we see a vicious cycle of excessive austerity, lower growth and higher unemployment. In some countries, you see youth unemployment of more than 50 percent, lower tax revenues, rating agencies come in and downgrade countries, and the vicious cycle starts again," he told CNBC.

(Read More: Germany's Steinbrueck: Another Cyprus Can't Be Ruled Out)

"It is very important that consolidation is enacted, but it needs to be a dosage that isn't deadly, and it must be accompanied by economic impulses, measures against youth unemployment, tougher regulation of the banks, because in some countries, we are not dealing with a debt crisis but in Ireland, Cyprus or Spain, it is a banking crisis," he added.

Growth Versus Austerity

The debate over growth versus austerity is set to take center stage as the financial leaders of the world's 20 biggest economies (the G20) meet this week to discuss debt ceiling targets.

(Read More: Soros Tells Germany It Should Leave Euro)

They will consider a proposal to cut their public debt over the longer term -- to well below 90 percent of gross domestic product, Reuters reported over the weekend.

The EU, however, has a more ambitious debt ceiling of 60 percent of GDP for its 27 members, a target that currently looks ambitious considering the debt piles of most European economies.

-By CNBC's Holly Ellyatt, follow her on Twitter @HollyEllyatt