Europe must balance austerity with growth: EU's Rehn

BRUSSELS Sat May 5, 2012 1:42pm EDT

BRUSSELS (Reuters) - Europe needs to balance cutting its debt with measures to stimulate growth, the region's top economics official said on Saturday, as austerity threatens to drag the bloc into its second recession in three years.

During the financial crisis, the message from Brussels has been that struggling euro zone countries must cut their budget deficits and carry out structural reforms to increase competitiveness.

However, with unemployment at record highs and some peripheral countries already deep in recession, Europe must turn its attention to ways to stimulate economic growth to lessen the blow of austerity measures, Olli Rehn, Europe's commissioner for economic and monetary affairs, said.

"Fiscal consolidation, while necessary (needs to be) done in a growth-friendly and differentiated way, in order to strike a balance between necessary fiscal consolidation and concerns for growth," he said in a speech at the Free University of Brussels.

Speaking on the eve of elections in France and Greece that could undermine Europe's hardline stance on budget discipline, he said, "Vulnerable member states under close market scrutiny need to convince both the market forces and policy-makers over their capacity to tackle fiscal challenges and thus create confidence."

Economists have suggested that tough deficit reduction policies could be eased to help Spain and Italy avoid a recessionary spiral, although bond markets have reacted badly, punishing Spain after it raised its 2012 deficit target.

Europe is now formulating a strategy to stimulate growth and intends to launch it at an EU leaders' summit in late June.

Italy and Belgium's leaders fell in behind European Central Bank President Mario Draghi's calls for a "growth compact" last week to stand alongside the bloc's fiscal compact for budget discipline.

One strategy is to increase the capital of the European Investment Bank, the EU's long-term lender, to allow it to make bigger investments in infrastructure projects and related areas across the European Union's 27 member countries.

"With the European Investment bank, the EU has a powerful institution to support growth and employment," said Rehn.

However, while the Commission may be eager to promote growth policies, Europe's paymaster Germany is reluctant to let countries backslide on austerity targets.

German Finance Minister Wolfgang Schaeuble told a conference in Spain this week that Europe's focus on austerity should continue, even if talks over the coming weeks at a European Union level examine ways to stimulate growth.

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