EU eyes German spending, seeking euro zone stimulus

November 16, 2016 6:13 AM EST

German Chancellor Angela Merkel arrives for a visit of a youth fire brigade in Wedding in Berlin, Germany, November 14, 2016. REUTERS/Axel Schmidt


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By Jan Strupczewski

BRUSSELS (Reuters) - The European Union effectively urged the German government to spend more in an election year as Brussels moved further away on Wednesday from its mantra of austerity, pushing for euro zone countries to loosen their budgets for 2017.

As anti-EU radicals tap into discontent across Europe after years of slow growth and high unemployment, EU leaders fear shocks such as June's Brexit vote and Donald Trump's election in the United States could stunt an embryonic recovery.

To spur growth and jobs, the executive European Commission called on Wednesday for the 19-country euro zone to loosen overall budget policy next year.

It did not name Germany, where Chancellor Angela Merkel's conservatives face an election next autumn complicated by the emergence of the fiscally hawkish, euroskeptic AfD. But since France, Italy and Spain are among those butting up against the currency union's budget deficit limits, only Berlin, running a surplus, has the scope and economic weight to make a difference.

"There is a case for a significantly more positive fiscal stance for the euro area," the Commission said in a review of next year's budget plans from national governments. "The recovery is still not accelerating, there is still significant unused capacity in labor and capital and uncertainty is high."

The aggregate euro zone deficit has fallen annually since early in the sovereign debt crisis which nearly broke the euro. German-backed EU austerity aimed at cleaning up state finances despite protests in many countries and concern from Washington brought it down from 6.3 percent in 2009 to 2.1 percent in 2015.

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The aggregate deficit is forecast by the Commission to shrink to 1.8 percent this year and 1.5 percent in 2017. Growth is predicted to slow this year to 1.7 percent from 2.0 percent in 2015 and drop further, to 1.5 percent, next year.

"We want to deepen the economic and monetary union and the Commission is acting as a finance minister of the euro area," Economics Commissioner Pierre Moscovici, a Socialist former French finance minister, told a news conference.

"This a key step toward a budgetary union in the euro area. We are orienting fiscal policy for the euro area."

There was no immediate response from Berlin, where Finance Minister Wolfgang Schaeuble has long contested suggestions that looser spending alone can generate sustainable economic growth.

Moscovici made clear that the call for looser fiscal policy applied mainly to those who could afford it. Germany, the biggest economy, had a surplus of 0.7 percent of GDP last year and is expected to have a surplus of 0.6 percent for this year.

"Those who have budgetary leeway should spend and invest more for themselves and in the interests of all," Moscovici said.

Second-ranked France, where the anti-EU National Front leads polls for elections next spring, and Spain are above the deficit ceiling of 3 percent. Italy is below that, but has huge debts.

The Commission said the fiscal expansion next year in the euro zone as a whole should be 0.5 percent of GDP.

It said that a fiscal expansion of 0.3 percent would be the lower bound of the range and would contribute to ensuring that the euro area halves its output gap in 2017, while being broadly compatible with the objective of fiscal sustainability.

It said a fiscal expansion of 0.8 percent would be an upper limit and would let the output gap be fully closed in 2017, though could mean inflationary "overheating" in some countries.

Underlining its indulgence for looser budgets, the Commission did not suspend EU funds for Spain and Portugal for breaching fiscal rules last year and did not reject any state's 2017 budget plans despite some appearing to breach EU limits.

(Editing by Alastair Macdonald and Catherine Evans)



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