Europe forced to rethink austerity measures

Fearing that a generation of Europeans is doomed to joblessness, the European Union is quietly side-lining the doctrine of austerity and instead placing its bet on encouraging growth.

For the past three years, debt-burdened southern Europe has been taking the knife to government budgets, toeing the line set by German Chancellor Angela Merkel, whose country is shouldering the tab for bailing out profligates.

But early doubts in this strategy are now sprouting like hothouse flowers.

If budgets are chopped too fast, say critics, an economy goes into a death spiral. Activity shrinks, government income falls, so spending needs to be trimmed again to meet borrowing targets, and so on.

Topping the list of Europe's worries is unemployment. Across the 27-nation bloc, 10.9 per cent of the workforce has no job. But in the 17 countries with the euro single currency, the rate is 12.1 per cent, or more than 19.2 million people, the highest since records began in 1995, according to the official agency Eurostat.

Joblessness is highest in Greece, at 27.2 per cent, followed by Spain at 26.7 per cent and Portugal at 17.5 per cent. Unemployment among young people in these countries is truly desperate: 59.1 per cent in Greece, 55.9 per cent in Spain, 38.4 per cent in Italy and 38.3 per cent in Portugal. People who have spent four or five years at university are now washing dishes or doing gardening - if they can find work - and many contemplate emigrating.

As the pain has deepened, public anger has flared and political criticism of austerity has swollen. Leaders who were quietly doubtful have found their voice, and some who were once pro-austerity have changed their tune.

"After three years of firefights, patience with austerity is wearing understandably thin," European Council President Herman Van Rompuy said yesterday, as he demanded "immediate action" from governments to promote growth and create jobs. "Taking these measures is more urgent than anything."

In his maiden speech after being appointed Prime Minister, Italy's Enrico Letta declared: "Italy is dying from austerity itself - growth policies cannot wait." He vowed to brake or scrap several austerity policies set by his predecessor, Mario Monti.

International Monetary Fund head Christine Lagarde, who previously led the charge for austerity, last month urged eurozone governments to pace their spending cuts, saying these do not have to be "brutal ... or massively front-loaded".

Ireland and Portugal have been given an extra seven years' space to repay their bailout loans. Spain last week secured an extra two years to meet eurozone targets on its deficit.

Pro-growthers pin their hopes on the European Central Bank (ECB), the master of the euro, which on Thursday slashed its key interest rate for the first time in 10 months, by 0.25 of a percentage point to a record low of 0.5 per cent, and signalled it would keep rates low.

Keeping the cheap-money spigot open, though, is only one thing. Lending to companies in debt-strapped countries remains very constricted, as banks are cautious about handing out money.

Also unresolved is how Italy, France and other over-spenders will meet their immediate targets on spending if they fail to spur growth and still hesitate to wield the budget axe. Then there are the unaddressed long-term reforms, such as reducing labour costs, freeing up the employment market and reforming pension schemes.

In Italy, public debt to GDP is nearly 130 per cent, compared to eurozone rules of no more than 60 per cent. The previous Government said it would peak at 130.4 per cent this year and then decline. But the OECD says on present trends it will rise to 134 per cent in 2014, and the budget deficit will surge to 3.8 per cent of GDP, compared to the supposed maximum of 3.0 per cent.

The big loser in the austerity war is the Franco-German alliance, which by some accounts is at the lowest ebb since the end of World War II.

French President Francois Hollande, a Socialist, led criticism of austerity in defiance of the conservative Merkel. The shift in mood means Hollande is no longer alone in Europe. But Merkel faces elections in September, and she is staking victory hopes on her popularity for taking a tough line with spendthrifts.

No one is willing to marginalise the EU paymaster. So, by next month's EU summit, austerity may be dead, but it will not yet be buried.