European leaders will cite stronger public finances, normal bank lending and lower unemployment as their priorities this week in trying to pull Europe out of recession and shore up confidence in the euro.
The goals, laid out in a draft agreement for a European Union summit, are part of the bloc’s plan to coordinate economic policies as a means of taming its sovereign debt crisis.
Leaders will also focus on bringing unit labour costs down, boosting productivity and trying to ensure that countries never again rely on borrowing to fuel economic growth, one of the mistakes that led to the crisis in Greece.
“Implementation continues to be the key,” reads the draft agreement in an apparent reference to concerns that a fall in borrowing costs for euro zone countries since the start of the year has weakened governments’ determination for change.
“Determined action is required to underpin the strong political commitment to promote growth and jobs and to respond to fiscal, macroeconomic and structural challenges.”
Financial markets want to see economic growth rates high enough to guarantee debt will be paid back, so EU leaders must try to boost economic output without the help of borrowed money.
That leaves structural reforms, such raising retirement ages, easier hiring and firing laws, cutting wages or opening up some shielded sectors to more competition - changes that are often politically difficult to implement.
EU leaders are expected to agree to keep tightening budgets but in a “differentiated and growth-friendly way”, focusing on the structural balance, which aims to strip out the effects of the business cycle and one-off spending or revenue.
In EU jargon, growth-friendly consolidation usually means a preference for governments slashing spending rather than raising taxes to reduce budget deficits.
Differentiation means that countries like Greece, Ireland or Portugal, cut off from markets because investors had doubts if they would get their money back, need to consolidate much more quickly if they want to borrow commercially again.
On the other hand, the euro zone’s biggest economy, Germany, has a balanced budget and investors pay to lend to Berlin. Some analysts say Germans need more encouragement, possibly a Value-Added Tax cut, to buy more from the rest of the region.
Focus on the structural rather than the headline budget balance has already won more time for Portugal, Spain and most likely France to improve their budget balance.
Good performance in structural terms might also help Italy, which according to EU forecasts will achieve such a balance this year even though its headline deficit will be 2.1 per cent of output.
“There could be room for a limited degree of tolerance for public spending that could end in a limited deficit for productive investment,” Italy’s European Affairs Minister Enzo Moavero said.
Without explicitly naming Italy, the draft conclusions of the summit underline that EU budget laws allow a government to spend on projects that help public finances, especially if it is close to a structural balance.
“The European Council recalls that while fully respecting the Stability and Growth Pact (EU budget rules), the possibilities offered by the EU’s existing fiscal framework to balance productive public investment needs with fiscal discipline objectives can be exploited,” the draft said.
In Greece and Spain, one in every two people aged 15-24 is out of work. More than 26 million people are unemployed across the EU, a rate of nearly 11 per cent.
“Addressing unemployment is the most important social challenge facing us,” the draft conclusions said.
But for the eurozone economy to start growing again in the second half of the year, credit has to start flowing.
It is now hampered by relatively low business confidence and banks’ fears that any loans they make may not be repaid.
EU is working on a law that would force banks to have higher capital, take fewer risks, and, especially in the case of large, cross-border banks, be supervised more closely by a single supervisor: the European Central Bank.