EU Commission: Growth first then fiscal consolidation

Olli Rehn, Vice-President of the EC in charge of Economic and Monetary Affairs and the Euro, gave a press conference on the 2013 spring economic forecast. (EC Audiovisual Services, 03/05/2013).

The European Commission, the EU’s executive body, released yesterday its spring forecast for the economic prospects of the Union in 2013-2014. There are three issues to watch in the released text and also in what Olli Rehn, Commission Vice-President for Economic and Monetary Affairs had to say in a press conference in Brussels.

Firstly he accepted that unemployment will continue to beset the Union, because the level of economic activity is unable to offer more jobs in the foreseeable future. Rehn however didn’t miss the opportunity to note that ”At the same time, disparities across member states remain large. In Spain and Greece unemployment rates are at an unbearably high level of 27% this year, and expected to fall slightly next. At the same time, unemployment in Austria is 4.7% and in Germany 5.4% “.

This observation brought the Commissioner to his second more important remark, that France and Spain would need two more years to bring their fiscal deficits to acceptable levels. With this remarks about the EU policy mix he clearly prioritised the fight against unemployment, leaving in second place the drive for fiscal consolidation. Berlin probably will disagree with that.

What Rehn had to say about Italy was probably the third most crucial point he made about Eurozone’s short medium prospects. He stressed that “Italy reduced its deficit from 3.8% to 3.0% of GDP in 2012. For this year (2013), the deficit is forecast to stay below 3% of GDP, which facilitates exiting the Excessive Deficit Procedure (EDP)…which brings Italy close to its medium-term objective of a balanced budget”. In short Rehn acknowledges that Italy has almost delivered what the country promised to its European partners back in November 2011, when Silvio Berlusconi resigned and Mario Monti took over in Rome.

What after zeroing deficits?

Summing up what Rehn said yesterday about the medium term prospects of Eurozone and the European Union amount to an open acknowledgment that fiscal consolidation has to be subordinated to the target of growth and job creation. To this effect he noted, “In view of the protracted recession, we must do whatever it takes to overcome the unemployment crisis in Europe. The EU’s policy mix is focused on sustainable growth and job creation”.

With this observation and inasmuch as there is a real confrontation between austerity lovers and growth seekers, Rehn decisively placed himself in the last camp. On top of that EC Vice- President also said on Thursday, “Small and medium-sized enterprises (SMEs) will drive the recovery in Europe, but they need improved and easy access to finance”. The relevant article of the European Sting yesterday observed that the “the two more important institutions of the European Union, the European Commission and the European Central Bank, separately unveiled their intentions to seriously engage in an effort to create a new policy tool in support of the Union’s Small and Medium Enterprises (SMEs) and defragment Eurozone’s financial markets”.

Unquestionably what Rehn had to say during the last two days in the context of the Commission’s “Spring 2013 forecast” and in announcing the a new policy tool in support of the SMEs, place him firmly in the camp of ‘growth’ in contrast to ‘austerity lovers’.
Of course this doesn’t mean that the Commission will slacken in relation to its duties in enforcing the Excessive Deficit Procedure legislation. Seemingly however the Commission President Manuel Barroso, the Commission Vice-President Rehn and also the European Central Bank President, Mario Draghi, have started worrying seriously about the next day in Eurozone. That is after the fiscal gaps have been reduced to acceptable levels.

Countries like Greece, Italy, Ireland and Portugal have already managed or are about to zero their fiscal deficits, without seeing any tangible prospects for growth. If they are left to their fate they will prove unable to break the vicious cycle of austerity and recession, and soon will appear incapable of maintaining their government budgets in balance. The expensive euro and the fact that all south Eurozone is left out from the core financial markets, will condemn those countries to permanent misery and socio-political disintegration. A lot of people start to share this view and believe in this analysis after three years of crisis.

Given all that, the Commission and the European Central Bank are about to undertake ground breaking initiatives in order to set Eurozone’s economy back in motion. The European Sting is monitoring those efforts very closely.