European Leaders’ Softening on Austerity May Accelerate

By Patrick Donahue

Europe may accelerate a shift away from its austerity-first agenda this week as the new Italian government changes course and a German-Spanish investment pact underscores a renewed focus on combating record unemployment.

Yesterday’s swearing in of Italian Prime Minister Enrico Letta ends a political deadlock nine weeks after voters rejected the country’s budget-cutting course. German Finance Minister Wolfgang Schaeuble, a champion of austerity, will travel to Spain today to unveil a plan aimed at spurring investment in Spanish companies. Later this week, the European Central Bank may also cut interest rate at a meeting.

 

“You have to react to economic developments -- we do so in Germany,” Schaeuble told members of Chancellor Angela Merkel’s Christian Democratic Union in Berlin last week. “We are not bureaucratic; we are not stupid.”

The new Italian government’s pledges to dismantle parts of the budget-cutting project undertaken by ousted premier Mario Monti open a new front in the debate over the German-led policy of austerity to overcome the bloc’s debt crisis. As the 17- member euro area remains mired in recession, European leaders are joining global critics in urging the bloc to devote more resources to boosting economic growth.

 

Italian bonds strengthened for a fourth week last week, with 10-year yields dropping below 4 percent for the first time in almost 2 1/2 years. As the two-month political gridlock ended, speculation also about the ECB’s possible rate cut.

|Bloomberg| Fragment