The European Union, or EU, on Wednesday eased off on its rigid austerity policy to focus on growth and help the struggling 17-nation economic bloc to get back on its feet.
EU officials said budget cuts would still have to be made but at a slower pace and the countries must focus on economic reforms to boost growth. The shift in policy to structural economic reforms from austerity came in a bid to spark economic growth. The single currency area has now been in recession for six straight quarters and record high unemployment that has provoked fears of social protest.
France will now be required to reduce its deficit to 3 percent by 2015 while Spain will have until 2016 to correct its excessive deficit. Portugal, the Netherlands and Slovenia received an extra year to slash their deficits, as worries grow over the future of the region's economies.
“The social emergency in many parts of Europe and the increasing level of inequalities in some regions add to the pressing need for reforms,” Jose Manuel Barroso, European Commission President, said during the presentation of the Commission's recommendations for 23 of the EU's 27 member states, Reuters reported.
"The fact that more than 120 million people are now at risk of poverty or social exclusion in Europe is a real worry. We need to reform, and reform now. The cost of inaction will be very high," he said.
Both France, the euro zone’s second-largest economy, and Spain, the fourth-largest, are suffering from high unemployment, which has led to unrest among the countries' people. France is currently dealing with an unemployment rate of 10.6 percent, but still below the euro zone average of 11.4 percent. Spain, along with Greece, is worse off with an unemployment rate of more than 27 percent.
Surprisingly, the European Commission put no extra pressure on the euro zone’s fourth largest economy to adopt new reforms on top of the existing agenda, a Credit Agricole research note observed.
Three of the region's four largest economies are now suffering persistent negative growth, fueling concerns that Europe could be facing a Japan-style “lost decade.” The euro zone economy shrank by 0.2 percent in the first quarter while Germany, the largest European economy, narrowly avoided recession but the main worrying thing is Spain and Italy contracted at 0.5 percent in the first three months of the year.
Meanwhile, the Organization for Economic Co-operation and Development, or OECD, on Wednesday, slashed its growth outlook for the 17-state bloc and warned that recession in Europe is threatening the world's economic recovery as a whole. The OECD currently expects that the euro zone’s economy will shrink by 0.6 percent this year, far worse than its prior estimation of a 0.1 percent contraction.
Recent data from Eurostat, the EU's statistics office, showed that most of the euro area countries were hit hard by the current financial crisis with record unemployment and rising debt despite pursuing strict austerity policies, which generally include spending cuts, tax increases, or both.