EU to ease pace of austerity to help economy

BERLIN (AP) -- The European Union will ease its focus on austerity as a way to solve its three-year debt crisis when it unveils country-specific economic policy recommendations Wednesday.

The EU Commission, the 27-nation bloc's executive arm that oversees budget rules, is expected to grant France, Spain and others more time to slash their deficits. That means governments will be allowed to stretch out spending cuts over a longer time so as not to choke off growth as they try to fight record unemployment and recession.

EU officials have indicated the recommendations will call for continuing debt reduction, but at a slower pace, instead stressing the need to implement sweeping structural reforms, such as overhauling labor markets to make economies more competitive.

Analysts say the EU's insistence on forcing member states to aggressively slash spending and raise taxes has worsened the recession in many countries, especially in those like Greece or Portugal that have been bailed out by their European peers, leading to more unemployment and growing resentment toward EU policies.

Instead of keeping the spending taps on — as the U.S. has largely done until this year — the region concentrated on austerity even though companies and consumers weren't able to plug the gap left by the retrenching state.

Wednesday's recommendations will be presented in Brussels by EU Commission President Jose Manuel Barroso and the bloc's top economic official, Olli Rehn. They will become legally binding and shape the countries' fiscal policies once approved by the EU's leaders, who will discuss them at their summit next month.

Governments across the 17-nation eurozone last year slashed their budget deficits by about 1.5 percent of their combined annual GDP in structural terms, which takes into account the sluggish economy. That pace is set to be halved in 2013, the Commission said in its spring forecast earlier this month.

The leaders of Italy, Spain, Portugal, Greece and other countries hit hard by the euro's three-year debt crisis have long pleaded for more leniency, but Germany and other creditor nations insisted on meeting the agreed deficit reduction targets.

The protracted recession in the eurozone has over the past few months led to a debate over the merits and faults of budget austerity among policymakers, economists and in the media. It has resulted in a growing consensus that European governments must shift their budget policies more toward fostering growth to end the downward economic spiral.

The reasoning is that growth will provide governments with the extra revenue they need to pay down debt. The recession does the opposite, undercutting the austerity measures' effectiveness.

EU officials have indicated that France and Spain, the eurozone's second- and fourth-largest economies, will be granted two extra years to bring their budget deficits below the EU ceiling of 3 percent of annual economic output, provided they don't fall behind on their targets for structural reforms.

France's deficit last year stood at 4.8 percent of GDP and the Commission expects it to hit 3.9 percent this year. Spain's deficit, excluding bank recapitalization measures, is expected to narrow from 7 percent in 2012 to 6.5 percent.

Some countries, however, are expected to drop off the Commission's list of nations whose budget is under increased surveillance because of an excessive deficit.

EU Employment Commissioner Laszlo Andor of Hungary said on Twitter before the official announcement that his home country will be dropped off that list.

Officials have hinted that the Commission might also end its so-called excessive deficit procedure against Italy, which has a high overall debt level but a budget deficit within the EU limits.

Since the debt crisis erupted, EU nations have agreed to give the bloc's executive arm more powers in scrutinizing national budgets, complete with the ability to punish or issue binding policy recommendations for countries running excessive deficits.

In practice, however, the Commission wields considerable power in its dealings with smaller member states, but big nations like France are hard to bring into line.

A leading international body warned Wednesday that the recession in Europe risks hurting the world's economic recovery as whole. The Organization for Economic Cooperation and Development said the eurozone's economy is now expected to shrink by 0.6 percent this year, against a predicted drop of 0.1 percent in its latest outlook six months ago.

The EU Commission this month forecast the eurozone's economy would shrink by 0.4 this year. It estimated the wider EU — which includes the ten nations such as Britain that don't use the euro currency — would suffer a 0.1 percent contraction.

With a population of more than half a billion people, the EU is the world's biggest economy and the largest export market. If it remains stuck in reverse, companies in the U.S. and Asia will be hit, too.

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Pablo Gorondi in Budapest, Hungary, and Greg Keller in Paris contributed to this report.

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