While I suspect this is a case of too little, too late, it is increasingly evident that European policymakers on some level realize the errors of their ways. From the Wall Street Journal:
Euro-zone governments are expected to give Spain more leeway to meet its budget-deficit target next year, according to officials involved in the discussions, in a sign they intend to shift away from rigid enforcement of the currency bloc’s budget rules.
Austerity will still be the guiding principle of European fiscal policies. But the likely Spanish move suggests the rules will be adjusted in some cases to account for the fact that when economies go into recession, their budget deficits usually rise.
Officials said the flexibility is unlikely to stop with Spain’s politically sensitive deficit target. Among other countries that may take advantage of the rules in the future is France, which would have to pass large cuts to achieve its current deficit target for next year—a task likely to clash with the pledges of Socialist President-elect François Hollande to spur economic growth.
It is not clear that this shift gives struggling nations enough room, but it is a step in the right direction that policymakers now recognize that austerity programs have been self-defeating. Likewise, perhaps even the Bundesbank is coming around to the realities of European adjustment. From the FT:
The Bundesbank, the most hawkish of central banks, has signalled it would accept higher inflation in Germany as part of an economic rebalancing in the eurozone that would boost the international competitiveness of countries worst-hit by the region’s debt crisis.
A future German inflation rate above the eurozone average could be part of a natural adjustment process as crisis-hit countries pulled themselves out of recession, the Bundesbank argued in evidence to German parliamentarians submitted on Wednesday.
That said, I wouldn’t get too eager that the Bundesbank is eager to rush into more easing:
“In this scenario, Germany could in the future have an inflation rate somewhat above the average within the European monetary union, although monetary policy will have to ensure that inflation overall in the Emu is consistent with the goal of price stability and that inflation expectations remain firmly anchored,” the bank said.
They are not talking about easing overall policy, just acknowledging that even in the context of a maintained inflation target, Germany will experience inflation in excess of that target.
All in all, though, positive developments, at least at the margin. My concern is that all the recent talk about “growth compacts” and such will yield more headlines than positive outcomes, and as a consequence policymakers will begin to believe that the original path of austerity was in fact the only path to follow.