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Euro Capitals Tighten Fiscal Leash as EU Starts Austerity

bloomberg.com - In Madrid, the government is paring spending on roads and rails. In Rome, state property is to be sold off. In The Hague, lawmakers agreed to the second set of extraordinary cuts in two years.

Even with the 17-nation euro area projecting economic expansion next year for the first time since 2011, policy makers are keeping a fiscal leash on growth by maintaining austerity policies born in the fight to save the euro.

That’s because for the first time officials in Brussels will get to review spending plans before they are approved by national parliaments. The European Commission, the European Union’s regulatory arm, was empowered to demand revisions in a bid to impose discipline and encourage coordination.

“The pressure to continue with austerity is unabated,” said Paul De Grauwe, a professor at the London School of Economics.

While there are no new penalties built into the system, the EU says that by pointing out flaws in the draft budgets that had to be submitted by Oct. 15, governments can mend their ways.

“Don’t underestimate the impact of the upcoming so-called two-pack,” EU President Herman Van Rompuy said on Oct. 2 in Brussels, referring to the two pieces of EU legislation that authorized the budget oversight. “It won’t make Brussels more popular in our capitals.”

Demands for rigor follow three years of euro-area cost-cutting that totaled 216.7 billion euros ($293 billion). That exceeds the size of the Greek economy.

Primary Surpluses

Cyclically adjusted primary-balance figures, a measure of fiscal health before interest expense that attempts to factor out economic swings, show the savings since 2010. The euro area moved from an average deficit of 2.3 percent of gross domestic product in 2010 to what the EU forecast in May will be a positive balance of 1.7 percent of GDP at the end of 2013.

In Ireland, the cyclically adjusted primary balance will have moved from a deficit of 25.4 percent of GDP in 2010 to a 2.3 percent deficit in 2013, according to the EU forecasts. Greece has seen a deficit of 2.6 percent in 2010 shift to a predicted 6.3 percent of GDP positive balance in 2013.

Still, following six quarters of contraction, the longest slump since the euro’s debut in 1999, the debt burden has only grown. As a percentage of GDP, debt has increased across the single currency region to an average of 92.2 percent after the first quarter of 2013 from 85.6 percent at the end of 2010.

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