EU Leaders Set to Conclude Austerity Is Not Enough

Bowing to mounting evidence that austerity alone cannot solve the debt crisis, European leaders are expected to conclude this week that what the debt-laden, sclerotic countries of the Continent need is a dose of economic growth.

E.U. Flags
Photo: Ken Sciciuna | Getty Images
E.U. Flags

A draft of the European Union summit meeting communiqué calls for ‘‘growth-friendly consolidation and job-friendly growth,’’ an indication that European leaders have come to realize that austerity measures, like those being put in countries like Greece and Italy, risk stoking a recession and plunging fragile economies into a downward spiral.

The difficulty, however, is that reaching such a conclusion is not the same as making it happen.

Instead, leaders will discuss long-term structural reforms and better use of E.U. subsidies, while avoiding mention of the one thing that could change the climate: a fiscal stimulus from Germany, the euro currency zone’s undisputed powerhouse.

Then the summit meeting, which is to be held in Brussels and be greeted by a national strike in Belgium, will try to satisfy Berlin’s desire for fiscal discipline by wrapping up talks on a new intergovernmental treaty.

With its emphasis on punishing euro nations that exceed deficit and debt level, the agreement, or “fiscal compact,” has been described privately by one official as a plan to criminalize Keynesianism.

Nevertheless, the hope is that if it gets the treaty it wants on fiscal discipline, Germany will agree to far-reaching efforts to end the debt crisis.

And while some see the new, pro-growth rhetoric as empty — or even cynical — others believe that it marks a psychological turning point.

“I think it is an important shift, particularly from Germany but also from others, from the phase where it was all about fiscal balance and consolidation to a more comprehensive approach where you have an all-encompassing look at economic sustainability,” said Nicolas Véron, senior fellow at Bruegel, an economic research institute in Brussels. “It is quite promising, but at this point I don’t see it translating into immediate measures.”

Those are badly needed in a Europe with more than 23 million people unemployed. Indeed, the lack of growth was highlighted by Standard & Poor’sthis month when it downgraded several euro zone nations, including France.

“We believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers’ rising concerns about job security and disposable incomes, eroding national tax revenues,” S&P said.

Other analysts concur, and some highlight the need for those few nations with room to maneuver to stimulate demand.

“Even countries with relatively strong public finances such as Germany — the country’s budget deficit fell to just 1 percent of GDP in 2011 — are tightening fiscal policy,” Simon Tilford, the chief economist for the Center for European Reform in London, wrote recently. “In so doing, European governments are standing conventional macroeconomic thinking on its head. Governments are withdrawing demand from their economies at a time of pronounced private sector weakness.”

Output in both the euro zone and the European Union is still around 2 percent lower than before the crisis.

The Spanish and British economies are still almost 4 percent short of their pre-crisis peaks, the Italian one nearly 5 percent, and the Greek and Irish economies 10 percent to 15 percent, Mr. Tilford added.

Greece’s deep recession has thrown its financial rescue package off target, complicating yet further efforts to restructure its debt and create a second, larger, bailout.

Germans increasingly accept that this is a dangerous outlook, said Joachim Fritz-Vannahme, director of the Europe program at the research institute Bertelsmann Stiftung.

“Many people now say that it will never work to push all the Southern European countries into austerity, hoping that, one day, they will pay back what they owe,”’ he said.

In Germany, the opposition Social Democrats have been calling for a new Marshall Plan for Europe, a reference to the U.S. aid program for the Continent after the World War II.

All of this makes the disjunction with what is on the table at Monday’s summit meeting more striking. The European Commission president, José Manuel Barroso, will propose better use of up to €82 billion, or about $108 billion, in EU subsidies, though it remains unclear whether national governments will agree and how much could be done quickly.

The 27 EU countries will also be asked to press ahead with a familiar list of proposals to liberalize their economies and remove bottlenecks — a long-term task that moves at a glacial pace.

Meanwhile, several nations are also expected to champion the need for a financial transaction tax, a plan that one official study suggested could cut growth.

Mr. Fritz-Vannahme contends that domestic politics makes it difficult for Angela Merkel, the German chancellor, to move because there is little trust that nations like Greece will make necessary structural reforms unless they are under acute pressure. Many Germans still feel that they are being blackmailed into bailing out nations that will not do their own homework, he said.

And some consider that Germany’s relatively healthy economy is already providing an economic stimulus to neighbors. German private consumption grew 1.5 percent last year compared with 0.6 percent in 2010, aided by a reduction in unemployment .

“The recognition is coming that austerity won’t work,” said Mr. Fritz-Vannahme, “but how to get beyond austerity politics is completely unclear. There is no master plan under discussion in this country.”