This extra time should be used wisely to address France's failing competitiveness. —Jose Manuel Barroso
BERLIN — The European Union moved away from its focus on tough austerity Wednesday when it gave France, Spain and four other member states more time to bring their budget deficits under control to support their economies.
Unveiling a series of country-specific policy recommendations in Brussels, the EU Commission, the 27-nation bloc's executive arm, said the countries must implement structural reforms, such as overhauling labor markets to make their economies more competitive.
Commission President Jose Manuel Barroso said that the pace of reform needed to be stepped up across the EU to solve the bloc's three-year crisis. "There is no room for complacency," he insisted.
Europe is stuck in a recession, with unemployment at record highs in several countries. This has led to a debate over the merits and faults of budget austerity as a way to solve the region's government debt problems.
By continuing to focus on controlling debt through austerity measures such as spending cuts and raising taxes, Europe's economic downturn has worsened and government revenues have been slashed. This in turn makes it harder to meet deficit targets.
There is now a growing consensus that European governments must shift their budget policies more toward fostering growth to end the downward economic spiral.
Besides France and Spain, the Commission is also granting the Netherlands, Poland, Portugal and Slovenia more time to bring their deficits below the EU ceiling of 3 percent of annual economic output. That means governments will be allowed to stretch out spending cuts over a longer time so as not to choke off growth as they try to fight record unemployment and recession.
The Netherlands and Portugal are granted one more year, whereas France, Spain, Poland and Slovenia are granted two additional years each.
Barroso rejected the idea that the Commission bowed to political pressure and was now too soft on the countries that are granted more time.
Singling out France, the eurozone's second-largest economy, Barroso said the "message to France is indeed a very demanding one."
"This extra time should be used wisely to address France's failing competitiveness," he added.
In its recommendations, the Commission urges France to implement credible "ambitious structural reforms to ... boost growth and employment." It also urges France to cut red tape, improve conditions for small and medium sized companies and strengthen competition in the country's service and energy sector.
"French companies' market shares have experienced worrying erosion in the last decade, in fact beyond the last decade, we can say the last 20 years," Barroso stressed.
"Structural reforms are essential to kick-start growth and serve the dual goal of reducing unemployment and restoring the sustainability of public finances," the Commission said.
Spain, the eurozone's fourth-largest economy which is mired in recession with an unemployment rate of 27 percent, now has until 2016 to bring its deficit under control, which is set to drop from 6.5 percent of GDP this year to then 2.8 percent.
To achieve this significant amount, it says Madrid must scrutinize all major spending programs, push ahead with its labor market reform, revise the tax system, reduce costs in the health sector and push through pending bank recapitalizations.
The Commission's recommendations will become legally binding and shape the countries' fiscal policies once approved by the EU's leaders, who will discuss them at their summit next month.
Some countries were also dropped off the Commission's list of nations whose budget is under increased surveillance because of an excessive deficit. They include Italy, Latvia, Hungary, Lithuania and Romania.
The most important of these decisions was on Italy, the eurozone's third-largest economy, where the Commission expects this year's deficit to come in at 2.9 percent and then 1.8 percent in 2014. However, the experts in Brussels gave the new government in Rome a long list of structural reforms that have to be pushed through.
Malta, however, was added to the watch-list and was urged to bring its deficit in line by next year, with a deficit of 3.4 percent of GDP and 2.7 percent in 2014.
The decisions bring the number of countries under the Commission's deficit watch to 16 of the EU's 27 nations, said Olli Rehn, the EU's top economic official.
Since the debt crisis erupted, EU nations have agreed to give the bloc's executive arm more powers in scrutinizing national budgets, complete with the ability to punish or issue binding policy recommendations for countries running excessive deficits.
In practice, however, the Commission wields considerable power in its dealings with smaller member states, but big nations like France are hard to bring into line.
A leading international body warned Wednesday that the recession in Europe risks hurting the world's economic recovery as whole. The Organization for Economic Cooperation and Development said the eurozone's economy is now expected to shrink by 0.6 percent this year, against a predicted drop of 0.1 percent in its latest outlook six months ago.
The EU Commission this month forecast the eurozone's economy would shrink by 0.4 this year. It estimated the wider EU — which includes the ten nations such as Britain that don't use the euro currency — would suffer a 0.1 percent contraction.
Greg Keller in Paris contributed to this report.
Follow Juergen Baetz on Twitter at http://www.twitter.com/jbaetz