European Stagnation

By THE EDITORIAL BOARD, The New York Times

Economic conditions in Europe, especially in troubled nations like Spain, Portugal and Italy, have deteriorated sharply in recent months. Worse, new data released last week provides no hope for a recovery soon. The unemployment rate in the 17 countries that use the euro hit a record of 12.1 percent in March, up from 11 percent a year earlier. In Spain and Greece, more than half of the labor force under 25 is looking for work.

The good news, if it can be called that, is that a barrage of negative economic data appears to have stirred European leaders and senior officials at the International Monetary Fund into finally acknowledging that the Continent’s austerity policies are imposing unnecessary pain and suffering on average Europeans while doing little to lower debts and deficits.

José Manuel Barroso, the president of the European Commission, recently declared that austerity “has reached its limits in many respects.” And David Lipton, the first deputy managing director of the I.M.F., recently called on Europe to adopt “more growth-friendly” policies and encouraged the European Central Bank to use unconventional measures like bond purchases to increase credit and stimulate the economy. This awakening is fine as a start. But real change will come when European leaders start reversing damaging budget cuts and restructuring their fragile banks. That means changing the status quo, no easy task. For starters, countries that use the euro have committed to maintaining fiscal deficits no higher than 3 percent of their gross domestic product as part of a “fiscal compact” with one another. And despite the fact that France, Portugal and several others are already struggling to meet that cap, even after raising taxes and slashing spending, nations like Germany and Finland remain committed to austerity. This is not smart. Enforcing these limits in the middle of a deep recession will not lower labor costs, increase competitiveness and reduce debt. On the contrary, it will simply perpetuate the downward spiral that weaker countries are stuck in and foster widespread anger without providing any meaningful economic payoff.

Meanwhile, a promising effort to deal with troubled banks appears to have been sidetracked or at least slowed. In December, the European Union agreed to centralize the supervision of large banks under the European Central Bank by March 2014 as a first step toward a banking union. But Wolfgang Schäuble, the finance minister of Germany, recently suggested that E.U. members first renegotiate changes to the union’s treaties to clearly separate the monetary and supervisory functions of the central bank. Wrangling over technical amendments could easily delay the broader effort to put the whole financial system on sounder footing.

At a meeting later this month in Brussels, E.U. leaders plan to discuss ways to improve the currency union, but they do not anticipate changing basic policies. In fact, analysts expect no major action until after Germany’s national elections in September. The conditions of 26.5 million unemployed Europeans who need help right away should not depend on an election that may or may not change anything.