By Paul Ames
GOTHENBURG, Sweden, Oct. 1 (Xinhua) -- When European Union (EU) governments rushed to shoot money into the economy last year to head off the threat of a global depression, they set three conditions for the cash flows that sent debts and deficits into orbit.
The "plundering" of public finances for the global economic bailout should be "timely, temporary and targeted," they said.
One year and billions of euros later, EU finance ministers are wrestling with that "timely and temporary" concept. They have to decide whether the tentative signs of recovery mean that it is time to rein in galloping deficit spending.
Their dilemma is simple, and is shared by their counterparts around the world: bring an end to the borrow-and-spend economy too soon, and those budding shoots of recovery may just wither and die; stick too long with fiscal expansionism, and the risk of creating a deficit-and-inflation time bomb may be primed to blast the world into the next crisis.
Meeting under the late-summer Scandinavian sunshine for informal talks, most EU finance ministers decided the year 2011 should be the crucial turning point.
That is when the governments should start to withdraw the stimulus packages which have kept their economies afloat since the autumn 2008 crash and bring deficits back into line with the so-called Stability and Growth Pact which was drawn up in the 1990s to underpin the solidity of the euro.
Under the pact, governments are supposed to keep public deficits below t3 percent of gross domestic product (GDP), while debt should be limited to 60 percent of GDP, or at least making downward progress towards that target.
Those thresholds effectively evaporated as governments scrambled desperately to pump money into failing banks, chopped interest rates and dug deep into their pockets to fund economic stimulus packages.
Twenty of the 27 EU nations are currently running deficits in excess of the three percent target.
Ireland is the worst offender at over 12 percent, with Latvia and Britain close behind. The Irish rate is now on a par with the United States, whose persistently lax spending under the Bush administration was long a target of criticism from European policymakers.
At the meeting in Gothenburg, ministers said they wanted to start reducing the excessive deficits by 0.5 percent of GDP per year from 2011. This means higher taxes or cuts in public spending, as economies start to emerge from the recession. Spain said it would move faster, with tax hikes expected as soon as next year.
However, officials stressed that both the 2011 target and the rate of deficit reduction represented aspirations dependent on the development of the economy rather than firm commitments.
EU nations are all painfully aware that the recovery remains fragile, and even best-case scenarios predict growth at rates well below pre-crisis levels.
The European Commission, the EU's executive arm, said the EU's post-crisis "potential growth" would be around 1.5 percent.
That is much healthier than the four-percent contraction expected this year, or the anemic 0.4 percent growth forecast for 2010, but it is significantly lower than the 2.5 percent potential rate before the meltdown.
EU officials grimly acknowledged that growth at such a low level would cripple efforts to tackle rising unemployment rates, let alone solve the long-term problem of Europe's aging population.
Jobless rates have soared to over nine percent across the EU and hit double digits in several nations. Almost one in five Spanish workers are out of work.
The unemployment rate is expected to get worse as Europe's labor laws, which often make it hard for companies to fire and hire workers, trigger a delayed reaction both to the impact of the crisis and the slow recovery.
All that means EU nations are wary of moving back quickly to fiscal discipline.
France in particular said this week that it plans a "grand loan" to finance a package of infrastructure programs, ranging from building next-generation computer networks to revamping Parisian urban transport, even as the public deficit hits levels not seen since the 1950s.
France's spending gap is due to rise to 8.5 percent of GDP next year, up from 8.2 percent in 2009.
Although Germany is not keen on new big spending plans, its deficit is expected to grow to around six percent next year as tax revenues tumble and the government is forced to spend more on unemployment benefits.
Faced with such gloomy data, the 2011 date for launching an exit strategy from the ballooning borrowing is not based on any undue optimism that the economy will be buoyant by then. But far ahead there is still some doubt about how things will look.
In addition, EU officials recognize that the return to fiscal discipline must be accompanied by "structural reform." That is government's shorthand for flexible labor laws that make it easier for firms to hire and fire, and to open up the services market that has so far been largely shielded from competition.
Traditionally, European governments have struggled to push through such unpopular measures even in good times. Doing so in lean years will be a major test of political will for European leaders.
Special Report: Global Financial Crisis
