Eurozone Close to Ending Era of Austerity

 

The eurozone will slow its pace of fiscal belt tightening to help reinvigorate growth, said EU Commissioner Olli Rehn, highlighting a policy shift that the United States and the International Monetary Fund have long been pressing for.

The pace of fiscal tightening around the globe is set to dominate talks by leaders of the Group of 20 advanced and emerging economies who have gathered in Washington for a two-day meeting.

 

The eurozone will slow its pace of fiscal belt tightening to help reinvigorate growth, said EU Commissioner Olli Rehn, highlighting a policy shift that the United States and the International Monetary Fund have long been pressing for.

The pace of fiscal tightening around the globe is set to dominate talks by leaders of the Group of 20 advanced and emerging economies who have gathered in Washington for a two-day meeting.

Advanced economies, particularly in Europe, have undertaken harsh austerity measures in recent years to curb growing debt, but those efforts have at times damaged economies already suffering from capital flight and under-investment from the private sector.

In an interview with Reuters on Thursday, European Commissioner for Economic and Monetary Affairs Olli Rehn said he has been “somewhat struck by the perception of economic and fiscal policy in Europe.”

“In the early days of the crisis, it was essential to restore the credibility of fiscal policy in Europe because that was fundamentally questioned by market forces,” he said.

Related: EU Leaders to Rethink Austerity Strategy

“There was no choice. Decisive action was taken. Now as we have restored the credibility in the short term, that gives us the possibility of having a smoother path of fiscal adjustment in the medium-term,” he added, noting that the United States was now more aggressive in its deficit cutting than Europe.

The United States, however, has resisted setting specific debt-reduction targets, saying the focus needs to be on lifting growth out of the doldrums.

U.S. Treasury Secretary Jack Lew said on Wednesday that a rush towards fiscal austerity in Europe had worsened the economic situation in some countries, and there was a need to assess the impact of budget cuts on growth and employment.

Related: US Treasury Secretary Urges EU to Focus on Growth, Not Austerity

[quote] “They are preaching to the converted,” Rehn said of the U.S., and increasingly the IMF’s, calls for less austerity. [/quote]

Last month, Rehn was involved in a public spat between anti-austerity economist Paul Krugman, who accused the Commissioner of a “Rehn of Terror” for arguing that the EU’s budget consolidation policies had restored market confidence.

In his column for the New York Times, Krugman accused Rehn of being in denial “when it comes to the effects of austerity”. According to the Princeton professor, it was the ECB’s pledge to purchase “unlimited” government bonds, not fiscal restraint, that restored calm to financial markets.

Responding to the criticism, Rehn said a slower pace of fiscal consolidation might have been possible if unlimited cheap funding had been available in international markets.

“What I don’t understand is where on earth the stimulus money could have come from,” he said in a separate interview with Finnish daily Helsingin Sanomat. “I sincerely hope that people who are cleverer than me will suggest alternative ways of getting credit flowing into Europe.”

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