Is Europe backing away from austerity?

Europe's leaders may be revisiting austerity policies in the face of slow economic growth and weak public support. Will that lead to concrete changes?

By , Guest blogger

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    International Monetary Fund (IMF) Managing Director Christine Lagarde speaks at the seminar on Fiscal Policy, Equity, and Long-Term Growth in Developing Countries during 2013 Spring Meeting of the International Monetary Fund and World Bank in Washington.
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My friend ET sent this my way, pointing toward it as the reason European stocks are rallying in the face of yet another contractionary Flash PMI day.

Europe is awakening to the fact that Austerity does not produce growth and the time to rein in debt spending is during booms, not on the heels of a major bust when spending is needed more than ever.

I believe, as he does, that this could be a pivotal moment in the way that Europe manages its crisis...

Recommended: Briefing After the 'sequester,' now what?

From the Guardian:

"Socially and politically, one policy that is only seen as austerity is, of course, not sustainable," Barroso said. "We haven't done everything right … The policy has reached its limits because it has to have a minimum of political and social support."

His comments follow last week's intervention on UK economic policy by the IMF. Its chief, Christine Lagarde, said the poor performance of the UK economy left her with no alternative but to urge George Osborne to revisit his austerity policy.

Barroso's remarks were a rare admission from Brussels that its policy prescriptions, mainly crafted by eurozone governments with Berlin in the driving seat, for dealing with the crisis of the past three years had either been flawed or were running out of steam. He added that in the quest to pull the eurozone back into growth, there was no point in piling up more debt. "Growth based on debt is unsustainable, artificial. That's the biggest lesson of the crisis," he said.

Barroso's unusual critique of German-driven austerity policies, particularly in the eurozone and in bailed-out countries, came as one of the biggest players in the bond markets also called for a relaxation of Berlin-style fiscal rigour.

Bill Gross, manager of Pimco, the world's biggest bond fund, said: "The UK and almost all of Europe have erred in terms of believing that austerity, fiscal austerity in the short term, is the way to produce real growth. It is not." In an interview with the Financial Times, he added: "You've got to spend money."

Quite an about-face in rhetoric, we'll see what actually takes place.

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