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Europe veers away from austerity

(MoneyWatch) The European Union has finally acknowledged what has long been apparent: Austerity is driving the trading bloc's economy into ruin.

Policy recommendations issued today by the European Commission, the EU's main executive body, urged a fundamental shift: The panel said some member countries should ease massive government spending cuts and tax hikes while simultaneously being given more time to reach deficit-reduction targets.

Instead of clinging to cutting deficits, Europe must focus on sparking growth and reducing a regional unemployment rate that tops 12 percent, said EC President Jose Manuel Barroso in announcing the recommendations.

"Now is the time to step up the fundamental economic reforms that will deliver growth and jobs, which our citizens, especially our young people, anxiously expect," he said in a statement. "This is the only way to address the two lasting legacies of this crisis -- the serious loss of competitiveness in many of our member States, and persistent unemployment, with all its social consequences."

France, Poland, Slovenia and Spain will be given two more years to shrink their budget deficits, while Portugal and the Netherlands are being granted an additional year. 

Europe is in the grips of a deep depression, with jobless rates of roughly 27 percent in Greece and Spain and more than 17 percent in Portugal. Some 19 million people are out of work in the eurozone. Meanwhile, lending to businesses and individuals is contracting, making growth all but impossible. The eurozone's GDP fell 0.2 percent in the first three months year and is expected to sink throughout 2013. 

By comparison, the U.S. has unemployment of 7.5 percent. Economists say the labor picture here would be even better if Washington hadn't recently administered its own dose of austerity in the form of large government spending cuts, or sequester, that took effect in March after Congress failed to reach a fiscal deal.

Although Germany, Europe's largest economy, and several other countries are faring better than the region's distressed countries, the slump afflicting the continent's smaller states is spreading to larger countries, including France, Italy and Spain. Conditions are also starting to stagnate in Germany, where the number of unemployed people is up 2.9 percent over a year ago.

That decline has caused political turmoil across Europe, with voters ousting pro-austerity regimes in favor of leaders who pledge to boost spending and take other measures to ignite growth. It has also stirred widespread popular anger with German Chancellor Angela Merkel, the region's leading proponent of austerity.

Today's EU policy shift underlines the growing skepticism with that economic program, experts said.

"Europe is abandoning austerity, and little wonder, given that it has driven all but Germany into deep recession in the process of defending what amounts to --- for everyone except Germany --- an overvalued currency," said John Makin, an economist with the American Enterprise Institute, in a research note. "But fiscal austerity and an overvalued currency is a toxic combination for sharp contraction."

European leaders will consider the Commission's recommendations at a summit in Brussels next month.