EU summit to loosen deficit shackles as unemployment climbs

European leaders are loosening the economic shackles once demanded by Germany as the recession and mounting unemployment in southern Europe shove aside the debt crisis as the euro area’s biggest headache.

A two-day Brussels summit starting Thursday will endorse plans for “structural” assessments of national budgets, according to a draft statement, using code for granting countries such as France, Spain and Portugal extra time to bring down deficits.

“Substantial progress is being made toward structurally balanced budgets and that progress must continue,” reads the statement, obtained by Bloomberg News. The focus is on “growth- friendly fiscal consolidation.”

European politicians are cloaking the shift in language designed to reassure investors who have driven borrowing costs lower since mid-2012 that balanced budgets remain the goal. The relative calm was barely disturbed by last month’s inconclusive election in Italy. Another milestone in coming out of the debt crisis was reached Wednesday, when Ireland sold 10-year bonds for the first time since its bailout in 2010.

As a result, officials in Brussels, Berlin, Paris and Madrid said Wednesday that an aid package for the next problem country, Cyprus, doesn’t even need to be discussed at the summit. It will be dealt with Friday starting at about 5 p.m., at a separate meeting of euro-area finance ministers.

The group of euro finance chiefs is considering a mix of options to reduce the amount of an aid package for Cyprus to near 10 billion euros ($13 billion), Dutch Finance Minister Jeroen Dijsselbloem, who leads the so-called eurogroup, said late Wednesday in The Hague. Dijsselbloem said no potential instrument is being excluded and considering privatizing state- owned companies could be “legitimate.”

The 17-nation economy will follow last year’s 0.6 percent contraction by shrinking 0.3 percent in 2013, the first back-to- back decline since the euro’s debut in 1999, the European Commission forecasts. It sees bloc-wide unemployment at 12.2 percent in 2013, with joblessness as high as 27 percent in Greece and 26.9 percent in Spain.

Pressure remains on France, Italy and the countries tapping emergency financial aid to make their economies more productive by reducing labor costs and deregulating professions.

The commission, the Brussels-based enforcer of the budget rules, fended off attacks from southern Europe that it has been too strict and parried warnings from northern Europe that it is becoming too lax.

“The simple allegation that the commission pursues austerity inflexibly does not hold,” Marco Buti and Nicolas Carnot of the commission’s economics department said in a policy paper Wednesday. “Nor obviously does the opposite accusation that the framework is being weakened.”

Greece, Portugal and Spain were granted extra deficit- reduction time last year. More extensions may come “in the near future,” the two officials wrote. Portugal is set for another respite, the commission’s president, Jose Barroso, told Expresso newspaper last week.

France is counting on estimates that it has made sufficient reductions in the “structural” deficit — a figure that factors out the effect of the economic cycle — to escape a European order to cut more.

The political leader most closely associated with austerity, German Chancellor Angela Merkel, is shifting focus as well, from the day-by-day fight to save the euro to her campaign for a third term in the September election.

Beppe Grillo, a comedian-turned-politician who grabbed 25 percent of the vote in Italy’s election, took his anti-austerity grievances to the German public Wednesday by saying that northern countries are conspiring to kick Italy out of the euro.

Once banks in northern Europe have cashed in their Italian bonds, Grillo told Germany’s Handelsblatt newspaper, Italy will be dropped out of the euro “like a hot potato.”

In a nod to Italy, the draft summit statement said the euro rules provide space for “productive public investment” by countries with deficits under the limit of 3 percent of gross domestic product. Italy was one of eight euro states to pass that test last year.

The summit marks the final European appearance by caretaker Italian Prime Minister Mario Monti, who blamed his 10 percent showing in the election on a backlash against budget cuts he imposed.

At the European level, a “pro-growth” policy bias may even play to Merkel’s advantage, enabling her to siphon votes away from the opposition Social Democrats — and potentially forge a coalition with them if dictated by the election outcome.

German officials have backed the commission’s approach, indicating that the Berlin leadership is sensitive to criticisms that budget cutting has gone too far. Euro rules include “the necessary flexibility to respond to economic developments,” Finance Minister Wolfgang Schaeuble said in Brussels last week. [Bloomberg]

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