European Countries Can Ease Austerity says EC, as OECD Cuts Growth Forecasts

European countries are to be allowed to ease austerity measures after the European Commission (EC) said it will permit some European Union (EU) member states to slow the pace of government spending cuts in an attempt to encourage eurozone growth. The decision comes after the Organisation for Economic Co-operation and Development (OECD) published figures predicting a 0.6% fall in the eurozone economy this year and the European Central Bank (ECB) warned that a renewed banking crisis was possible. With these economic headwinds in mind, most European treasurers will continue to hoard cash and adopt a risk-averse approach.   

The EC announcement of a slowdown in government spending cuts and permission for investments to try to encourage eurozone growth means that countries, such as France and Spain, which are struggling to control their public finances now have more time to implement their austerity plans, hopefully without precipitating the falls in economic activity that such measures have caused in Greece creating a vicious downward spiral of contraction. Poland, Portugal, the Netherlands and Slovenia are all also being given more time by the EC to complete their austerity plans.  

France and other ‘problem’ countries such as Spain, Poland and Slovenia will get two more years to bring their budget deficits below the eurozone-wide target of 3% of gross domestic product (GDP). The Netherlands, Portugal and other countries where the deficit is not so out of control are having their timetables extended by one year.  

Loosening of Fiscal Consolidation

Italy’s EC-sanctioned Excessive Deficit Procedure (EDP), which was to introduce swinging cuts, has been cancelled, as it has for other countries inside the EU but not yet part of the euro single currency zone, such as Latvia, Hungary, Lithuania and Romania. An EDP has, however, been recommended for Malta. Belgium has also unofficially been warned to take measures to correct its excessive deficit, although in the context of the overall lessening of the purse strings it has to be debatable if the country will listen amid this generalised dash for growth.   

EC president, Jose Manuel Barroso, said that the extra time being granted to countries to enact austerity measures, raise taxes and cut their deficits must be “used wisely” to lift competitiveness and put Europe back on a path towards growth. It is increasingly becoming obvious that only growth will rectify the deficits in Europe, with cuts just leading to a downward spiral in economic activity and higher welfare payments, prompting this move towards Keynesian economics.  

The specific country-by-country recommendations can be seen here. Even Europe’s stronger economies, including Germany, are being urged by the EC to allow wage increases and increase flexibility in the jobs market in order to improve competitiveness. The UK, which is outside the eurozone, is being encouraged to spend more on transport and infrastructure to kick-start its economy and to better support youth training and housing market reforms, after having already enacted austerity measures.  

Another Banking Crisis Possible Warns ECB

The European Central Bank (ECB) also warned mid-week that the eurozone’s shrinking economy, with the OECD predicting a 0.6% contraction in 2013, means that banks across the continent are once more vulnerable to a liquidity crisis. A rise in problem loans and high unemployment in countries such as Spain, Italy and Greece could create a renewed banking crisis as mortgages go unpaid and huge losses on over-inflated housing markets are finally recognised on banks’ accounts.  

In its latest assessment of the eurozone’s financial system on 29 May, the ECB also warned of the dangers of a prolonged recession exacerbating existing problems. Last year “was not a good year for banks at all,” conceded Vítor Constâncio, the vice president of the ECB in a statement and he highlighted the other dangers facing the eurozone’s banks – not the least of which is the need for increased capital ratios under the Basel III capital adequacy regime.  

Any reiteration of a banking crisis in Europe will lead to a ‘credit crunch 2.0’ and restrict access to bank funding for corporate treasurers. Many treasuries have, of course, already abandoned their reliance on this method of funding after the first credit crunch inspired by the 2008 financial crisis and are turning to the corporate bond market, commercial paper and other alternative avenues of finance. For smaller firms, however, another contraction in bank lending could be disastrous prompting another round of company closures and job losses.  

The ECB does now have better measures in place to deal with a banking crisis, with the central bank providing funds to struggling countries and long-term measures such as a move towards a single banking union already under way.  

OECD Predicts 2013 Eurozone Recession & Calls for ECB Action  

The OECD is still calling on the ECB to do more to support the eurozone economy, and to boost growth as much as possible in order to avert its predicted 0.6% fall in 2013 economic output. The central bank for the single currency zone had earlier this month cut interest rates to a record low of 0.5% in an attempt to kick-start growth and said that it remains “ready to act” if needed. Calls for increased ECB quantitative easing (QE) are no doubt likely to be heard in the struggle to encourage greater growth.    

In its twice-yearly latest economic outlook, published on 29 May, the OECD said that prolonged economic weakness in Europe could also damage the global economy, further putting treasurers from further afield on notice. 

The body, which represents 34 advanced economies, forecast average growth across all its members of 1.2% this year and 2.3% in 2014, but its fears for Europe were evident. The forecast of a 0.6% contraction in 2013 eurozone GDP contrasts markedly with the OECD’s prediction of just a 0.1% fall in its previous six-monthly report. Eurozone unemployment would also continue to rise from its present rate of 12% of the workforce, warned the OECD, which is not predicting any lessening in the rise until 2014 at the earliest. 

The OECD’s chief economist, Pier Paolo Padoan, told ‘Reuters’ that the eurozone remained the dominant area of concern. “Europe is in a dire situation,” he said. “We think that the eurozone could consider more aggressive [growth] options. We could call it a eurozone-style QE.”   


The dash for growth in Europe is to be welcomed as the austerity measures enacted so far have failed to kick-start the economy as the earlier US stimulus package seems to have done. America is currently coming out of the post-2008 recession, while across the Atlantic the picture continues to be murky. Deficit reduction is necessary but a growth is the new mantra.  

With extended timetables for cutting excessive government spending now allowed, it will be interesting to see if Europe’s economy recovers in 2014. The urge to continue to sit on large corporate cash reserves until then, will no doubt remain strong for many treasurers at large firms. Those at smaller companies will most likely continue to adopt a risk-averse approach and hope that the light at the end of the end of the tunnel isn’t a train coming towards them, in the shape of further recession.  




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