EU dials back austerity amid record recession, youth joblessness

Recession-hit countries including France, Spain and Italy won greater budget freedom as the European Commission tried to stem the euro economy’s longest slump and bring down a 24 percent youth unemployment rate.

The commission eased up on the austerity policies championed by Germany in the wake of the debt crisis without proposing new spending programs for the 17-nation euro zone, set to be the world’s weakest economic link in 2013.

“Because of good progress made, we now have the space to slow down the pace of consolidation,” commission President Jose Barroso told reporters in Brussels on Wednesday. “Member states should now intensify their efforts on structural reforms.”

A nonstop economic contraction since the fourth quarter of 2011 has given rise to fears of a Japan-style “lost decade” especially in the once-booming southern European countries blighted by the debt crisis.

A “small paradigm change” is in the works, Riccardo Barbieri, chief European economist at Mizuho International Plc, said in a note on Wednesday. “The EU is now weakening its stance on austerity, while focusing more on broad reforms.”

The commission forecasts that the euro economy will shrink 0.4 percent this year, with declines of 4.2 percent in Greece, where the crisis started, and 8.7 percent in Cyprus, the latest country to fall back on emergency aid.

German-inspired European Union rules cap deficits at 3 percent of gross domestic product, a level breached by 11 euro countries last year. The commission on Wednesday offered France two more years, until 2015, to reach that target. Spain was granted two years, until 2016, and Slovenia two years, until 2015. Portugal got an extra year, until 2015. Even the fiscally strict Netherlands, a German ally in the debt-crisis response, was allowed an extra year, until 2014.

The commission relaxed the pressure on Italy, which was right at the limit last year, to further shrink the deficit. That gives new Prime Minister Enrico Letta more room to cut property, consumption and payroll taxes, with the twin goals of restarting the economy and keeping his shaky governing alliance in power.

The commission’s verdicts require an endorsement by national finance ministers. While Germany has signaled that it won’t seek to overturn the recommendations, the anti-austerity tilt has provoked criticism from Berlin in the runup to national elections in September.