European states struggle with Draghi's challenge

Staff Writer
Columbus CEO

MILAN (AP) — Eurozone finance ministers on Friday said they were willing to help the European Central Bank in its plan to save the economy. How much they can do in practice, however, remains unclear.

The ministers met for the first time since ECB President Mario Draghi sketched out this month what has been dubbed "Draghinomics:" a three-pillared strategy including more stimulus from the central bank, added government spending and pro-business reforms to cut bureaucracy and make economies more productive.

The ECB covered the first pillar, offering a range of new stimulus measures at its last meeting. Governments from the 18 euro countries hold sway over the other two, but have been either reluctant or unable to act.

Jeroen Dijsselbloem, the Dutchman who heads the eurozone finance ministers' meetings, said Friday that governments are now ready to shift their focus from stabilizing financial markets to promoting growth.

Eurozone states, he said, should complement the ECB's efforts to boost the economy with "a credible mix of fiscal policies, structural reforms and investment."

"We all agree the euro area needs to increase this growth potential and create more jobs," Dijsselbloem said.

Europe's economy showed no growth in the second quarter. That followed four quarters of unsatisfying recovery from a crisis over high government debt. Unemployment remains at a painful 11.5 percent.

Draghi, sitting nearby, expressed satisfaction that there was agreement in the meeting that "to see investment return we need structural reform."

To get the economy going, governments will have to back up their words with actions. Some of the key reasons they have not so far:

—With tight EU rules on public deficits, there's little room for more government spending on projects that would help economic growth.

—The push for pro-business reforms in two of the more troubled countries, France and Italy, faces political headwinds.

—Germany, the dominant eurozone country, has backed calls for more investment spending, but excluded borrowing money to do it.

—There is talk of an EU-level investment fund to pay for infrastructure such as roads and bridges, but the details are far from filled in.

In Milan, the ministers' focus on reforms included the need to reduce the tax burden on labor, noting that the eurozone's overall tax burden is above the average for developed countries in large part due to the tax wedge on labor.

They did not, however, say they would ease European Union limits on borrowing. For some countries, borrowing more money to invest can help economic growth if the money is spent fruitfully.

EU rules limit national deficits to below 3 percent of GDP to ensure stability of the shared currency. Yet a strong focus on reducing deficits can choke off growth that is needed both to shrink debt and reduce unemployment.

Italy and others want to change how the EU calculates member states' deficits so that governments are allowed to keep some spending as long it helps economic growth, the EU official added. That idea has been opposed, however, by Jyrki Katainen, the new vice president of the European Union's executive commission, and by German Chancellor Angela Merkel.

Dijsselbloem ruled out any changes to the rules. He said they did not discuss a French request for more time to bring its deficit back below the 3 percent ceiling.

Italian Economics Minister Pier Carlo Padoan suggested a close focus on deficit limits was not appropriate at a time of economic weakness. He said that for Italy, bringing its deficit to 2.6 percent of GDP this year, as it currently aims to do, "was a goal compatible with a different macroeconomic picture."

As the meeting got under way, Italian Prime Minister Matteo Renzi sent a defiant tweet: "We respect the 3 percent. We are among the few who do. We therefore don't expect lessons from Europe but the 300 billion euros of investments."

Renzi referred to a European Commission proposal to get 300 billion euros ($388 billion) in public and private investment to revive the economy.

Dijsselbloem said that issue would be taken up by the wider meeting of European Union finance ministers on Saturday.


McHugh reported from Frankfurt, Germany. Juergen Baetz in Brussels contributed to this report.