European policy makers expressed a willingness to consider new ways to revive their ailing economy as they confronted fresh U.S. pressure to take action.
The bloc’s finance ministers and central bankers left weekend talks of the Group of Seven signaling that they’re poised to scale back austerity, are open to increased monetary aid and looking to unfreeze bank lending. European officials will meet in Brussels today to discuss the economy and review aid payments for crisis-struck nations from Greece to Spain.
Europe’s governments are in the midst of a policy rethink after three years of slimming budgets as they face up to a deepening recession in the euro area and a record unemployment rate that’s exceeded 12 percent. Still in doubt for economists is what kind of stimulus will actually be delivered and what effect it could have in the crisis-torn 17-member currency bloc.
“The new ‘fiscal realism’ is in evidence,” Mark Wall, co- chief European economist at Deutsche Bank AG in London, said in a report to clients. “Austerity may have reached its political limits and markets are happy to see some rebalancing. The key remains economic growth.”
Yields on sovereign debt that soared during the crisis have eased with the European Central Bank’s pledge to do whatever it takes to defend the euro. The single currency was little changed at $1.2986 as of 9:03 a.m. today.
Record Low
Italy’s one-year borrowing costs fell to a record low on May 10, while Portugal’s 10-year bond yield slid to the least since August 2010. Spanish 10-year yields rose last week for the first time in six weeks after declining to a three-year low of 3.94 percent on May 3. German 10-year yields were about one basis point from the highest level in seven weeks today.
Euro-area governments are already easing up on fiscal consolidation, with countries including France and Spain poised to receive more time to meet European Union budget-deficit goals. That means less pressure to take tax and spending steps to plug fiscal shortfalls caused by economic weakness.
Italy’s new government is trying to reverse some of its predecessor’s policies such as a pending sales-tax increase. Spain has introduced plans to support the creation of new businesses and invest in research and development.
The ECB is also debating what more it can do. The bank’s president, Mario Draghi, told reporters after the G-7 talks that it’s considering buying asset-backed securities among options to support lending to small and medium-sized companies.