Europe at wit's end over austerity?

The Euro logo is seen in front of the European Central bank ECB in Frankfurt/Main, Germany, on April 4, 2013.

Story highlights

  • Europe may have hit limits of austerity measures, says European Commission president
  • Opposition to austerity policies growing in eurozone countries hit by recession
  • Eurostat: debt in some eurozone countries rocketing despite budget cuts, tax increases

Europe may have hit the political limits of how far it can go with austerity-led economic policies because of the growing opposition in the eurozone's recession-hit periphery, the European Commission's president said on Monday.

José Manuel Barroso said that while he still believed in the need for sweeping economic reforms and drastic cuts in budget deficits, such policies needed to have "acceptance, politically and socially", which was now at risk.

"While this policy is fundamentally right, I think it has reached its limits in many aspects," Mr Barroso said. "A policy to be successful not only has to be properly designed. It has to have the minimum of political and social support."

Mr Barroso's comments come as advocates of the eurozone's austerity-led crisis response are on the defensive following a voter revolt in Italy, a deepening recession in much of the bloc and the tarnishing of a highly-influential academic treatise arguing high government debt severely hinders economic growth.

Mr Barroso's views are particularly influential because the commission has sweeping new powers to rule on whether struggling eurozone countries are able to ease up on belt-tightening.

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His remarks came the same day Eurostat released data showing debt in many struggling eurozone countries continues to rocket despite unprecedented budget cuts and tax increases.

Of the four eurozone countries receiving rescue aid from the EU last year, only Greece saw its debt levels decrease, from 170 per cent of economic output in 2011 to 157 per cent -- still the highest in the EU.

Irish, Spanish and Portuguese debt levels all hit euro-era highs last year, with Portugal close to surpassing Italy as the second most indebted nation in the eurozone. Lisbon's debt jumped to 124 per cent of gross domestic product from 108 per cent, narrowly behind Rome's, which rose from 121 per cent to 127 per cent. Overall, eurozone sovereign debt rose to 90.6 per cent of GDP last year, the highest on record.

The report also highlighted the periphery's divergence from the eurozone's core, particularly Germany, which was the only EU country to post a budget surplus in 2012 but also saw its debt level remain flat for the third straight year.

In another sign that Germany is decoupling from the rest of the eurozone, German tax revenue increased 3.4 per cent in the first quarter of 2013. In March alone, the increase was 5.7 per cent on last year, according to official figures, even though economic growth was 1.5 per cent.

"Falling unemployment and higher wages are the biggest contributors to this development," said Jens Boysen-Hogrefe, an economist and expert for public finances at the Kiel Institute, who cautioned the trend may not continue since it relied heavily on a high turnover in real estate. The sales tax on land and houses rose by 14.3 per cent in March.

Still, Mr Boysen-Hogrefe said the new data made it unlikely that Germany would post a budget deficit of 0.5 per cent of GDP this year, as finance minister Wolfgang Schäuble has estimated, noting Berlin would save €11bn alone on lower borrowing costs in the bond market.

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