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EU to change budget calculation to ease austerity

Friday - 9/20/2013, 9:20am  ET

JUERGEN BAETZ
Associated Press

BRUSSELS (AP) -- European Union finance experts have reached a preliminary agreement on changing the way the bloc determines some deficit figures, which will lessen the pressure for austerity measures in some crisis-hit economies, an EU official said Thursday.

The change to the calculation of the structural deficit would have "very significant" positive consequences for Spain because of its labor market structure, and somewhat less so for Ireland, Greece and Portugal, the official added.

Spain is struggling to overcome record unemployment of about 26 percent. The change could allow the government a slightly looser fiscal stance, thereby fostering growth.

The official, who spoke on condition of anonymity because of the sensitivity of the issue, said the working-level agreement on the "superior methodology" still needs approval by a meeting of top finance ministry officials from the bloc's 28 member states next week.

While national government officials were involved in this week's decision by a group of experts, an agreement cannot be taken for granted. Officials from more hawkish European creditor nations might resent the measure as an attempt to lessen the pressure on heavily indebted nations for what they deem to be necessary budget cuts and structural reforms.

The nature of the change is very technical -- changing the methodology of measuring the output gap between potential and structural growth -- but it could have significant repercussions. The result is used to calculate the structural deficit figure -- that is the deficit adjusted for the cyclical strength or weakness of the economy -- upon which the European Commission bases its policy recommendations.

"Easing austerity through change to EU budget policy is a very significant move," said Europe specialist Vivien Schmidt of Boston University. If agreed, this "could go a long way to easing the economic problems -- and thereby also the political ones -- of the southern European countries as well as Ireland," she added.

The change also appeared aimed at countering criticism that EU rules have aggravated the bloc's downturn by requiring governments to narrow their budget deficits even in the midst of a recession and record unemployment.

"It is also a silent acknowledgement of the fact that the radical deficit-cutting programs of the past three years have failed to address growth," Schmidt said.

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