EU and IMF clash over austerity

The British Financial Times recently posed the question: "Are the austerity measures imposed on struggling eurozone countries contributing to a deepening recession in the region?"

It is a question that returned to the front burner last month when the International Monetary Fund published a study arguing both the IMF and the European Commission were routinely underestimating the impact of austerity on economic growth over the course of the eurozone crisis.

Olli Rehn, the EU economic chief who is responsible for setting budget targets -- which, for eurozone countries, come with large penalties and fines if they are missed -- defended the focus on "budget consolidation", saying that while it may hit growth in the short term, it revives confidence in financial markets over the longer haul.

"We are having an open and constructive exchange of analysis with the IMF," Mr Rehn said on Wednesday. "It is important not only to look at the quantitative effect but to look at the confidence effect."

But even as he publicly defends the austerity-led reforms, Mr Rehn has quietly been easing off on the hardest-hit countries.

It is too early to say whether Mr Rehn's quiet easing will bear fruit. In the commission forecasts, most troubled eurozone "periphery" countries -- including Greece, Spain, Italy and Portugal -- will see a second straight year of contraction in 2013. All are projected to return to growth in 2014. Whether they do or not will be the real test.

EU-Digest