Austerity-growth dilemma climaxes

By Richard Lein, AFP

PARIS — The contours of recession and recovery inside the EU will be drawn with forecasts this week and a quarterly snapshot next week, setting the landscape for an informal summit on growth likely by the end of May. The new data, together with leading indicators from eurozone businesses, will keep financial markets on edge, the European Central Bank on watch and political controversy about austerity versus growth on the boil. The austerity-growth dilemma has come to a head, pitching so-called supply-side economics, based on sound budgets and a drive for efficiency, against calls for extra stimulus to counter the drag of cutbacks. “Austerity is a powerful medicine,” said Berenberg Bank economist Holger Schmieding. “If applied intelligently, it lays the basis for more competitiveness and higher growth in the future.

“But too much of a good medicine can weaken the patient,” he noted. European Union officials issue spring forecasts this week, and first-quarter growth data possibly showing recession the following week. Leading indicators on Friday signaled that eurozone private sector activity continues to contract, just as protests against budgetary reforms and appeals for stimulus increase in countries undergoing radical structural reforms to fight debt. The “stimulus measures implemented by the European Central Bank have not had a lasting impact on the real economy,” said Chris Williamson, chief economist at Markit research firm which published the indicators. While ensuring that low inflation is the ECB’s sole policy objective, its chief Mario Draghi called Thursday for putting “growth back at the center of the agenda.”

But he indicated that a further rate cut or special measures like the massive one trillion euro liquidity injection which temporarily calmed markets are not currently on the cards. Special ECB action “cannot replace … either fiscal consolidation or reforms as the way back to stability,” added Draghi. However analysts believe the ECB may re-evaluate its stance after the latest batch of data. “In our view, the May round of business surveys will be the key to assessing the risk of conventional easing in the coming months,” said Marco Valli at UniCredit in a note to investors.