EU Balks at Rule Change That Could Ease

Austerity
By
MATTHEW DALTON
CONNECT
BRUSSELSSenior European Union finance officials have declined to back a change in
budget policies that could have lightened the burden of austerity on Spain and other countries
hard-hit by the crisis, an EU official said.
The change was approved by technical experts at a meeting last week and was expected to be
supported at a Tuesday meeting of more senior officials in Brussels. But an article published
in The Wall Street Journal about last week's decision generated concern in some national
capitals about its effects on budget policies, an EU official said.
The new methodology will be sent back to the expert committee for further discussions, in an
effort to understand what its impact will be on all 28 EU countries, the official said.
The change involves a highly technical methodology that the European Commission, the
EU's executive arm, uses to calculate the "structural deficit," which is the actual budget
deficit adjusted for the strength of the economy. The commission uses the structural deficit to
determine how much austerity governments will need to undertake to meet EU budget
targets.
"The commission is fully on board with the new methodology," the official said. "We believe
it is superior."
The new methodology would have attributed more of the deficit in some countries to the
economic slump, rather than lax spending or too-low tax revenues. That would have
benefited Spain and some other crisis-hit governments.
It was supposed to have been used by the commission in its next round of estimates of the
structural deficit, to be published in November. Now that will have to wait, if it is approved at
all.
Commission spokesman Simon O'Connor said that "the current methodology will continue to
be used for the time being."
Europe's current calculations about how much of the deficit is structural and how much is
caused by the downturn in the business cycle assume much of the budget deficits seen in the
bloc's weakest economies are built-in, meaning they will persist even after the economy has
returned to full strength. If a deficit is structural, rather than cyclical, more austerity
measuresspending cuts or higher taxesare required.
The calculation is based on the commission's finding that even some of the bloc's weakest
economies are operating relatively close to full capacity, which many governments dispute.
For example, the latest commission estimate is that more than two-thirds of Spain's expected
budget deficitover 6% of gross domestic productis structural, despite the fact that nearly
27% of Spain's labor force is officially unemployed. A high unemployment rate increases
government transfer payments and reduces tax revenues.
The reason is the commission's grim assumption that the "natural" rate of unemployment in
Spainif the economy were operating at full potentialis 23%.
The new methodology would have lowered those estimates for crisis-hit countries.