In the latest shift away from the austerity of the euro zone crisis, European Union leaders signalled at a summit that they were ready to give member states extra time to consolidate their budgets as long as they pressed ahead with economic reforms.
Under pressure from Italian Prime Minister Matteo Renzi, the leaders adopted a text which pledged to make "best use" of the flexibility built into the bloc's fiscal rule book - the so-called Stability and Growth Pact. Renzi, whose country has the second biggest debt in Europe at more than 135 per cent of gross domestic product ( GDP), has been pushing for a more growth-friendly interpretation of the fiscal rules since taking office in February, because without faster growth Rome won't be able to pay down its debts.
"If a country enacts serious structural reforms, it has the right to flexibility, which is the most important political point," Renzi told reporters at the end of the two-day summit. He called the new language a "turning point" for Europe.
In reality, Europe has been shifting towards a softer fiscal stance since last year in an effort to revive growth in struggling southern states, and combat high unemployment, particularly among young people.
Countries like France and Spain have already been given extra time to reach the EU's deficit target of 3 per cent of gross domestic product (GDP). In parallel, the European Central Bank (ECB) has cut interest rates to record lows to ward off the threat of Japanese-style deflation in the 18-member euro zone Germany, the most ardent defender of tough budget policies, has been worried that fiscal leniency could lead to a new spending spree by governments taking advantage of low borrowing costs and open the way for a new crisis.
ITALIAN-GERMAN DEAL
But Renzi and German Chancellor Angela Merkel reached a deal late on Thursday which stresses the need or a flexible interpretation of fiscal rules, while stopping short of any change to the EU pact. Merkel stressed at a news conference that it would be up to the European Commission, not member states themselves, to decide whether extra time was granted. "The best use of flexibility means the best use, not the fullest use but the best, the most appropriate for the situation," Merkel said.
Under EU rules, governments have to strive towards a budget close to balance or in surplus, excluding one-off revenue and spending and the effects of the business cycle. They also have to reduce public debt. But the rules also say that governments can be given more time to reach budget balance if they undertake reforms that have a verifiable positive impact on economic growth - an option that has so far never been used. "Structural reforms that enhance growth and improve fiscal sustainability should be given particular attention, including through an appropriate assessment of fiscal measures and structural reforms, while making best use of the flexibility that is built into the existing Stability and Growth Pact rules," the text agreed by leaders read.
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