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EU promises less austerity as G20 debates debt

European Economic and Monetary Affairs Commissioner Olli Rehn attends a debate on the situation in Cyprus at the European Parliament in Stra
European Economic and Monetary Affairs Commissioner Olli Rehn attends a debate on the situation in Cyprus at the European Parliament in Stra

By Jan Strupczewski

WASHINGTON (Reuters) - The euro zone will slow its budgetary belt-tightening to help reinvigorate economic growth, a top EU official said on Thursday, highlighting a policy shift the United States has long been pressing for.

"They are preaching to the converted," EU Economic and Monetary Affairs Commissioner Olli Rehn told Reuters.

The pace of fiscal tightening around the globe is set to dominate talks by finance ministers and central bank governors from the Group of 20 advanced and emerging economies, who are meeting late on Thursday and again on Friday in Washington.

Among the topics up for debate is whether or not to set numerical targets for debt and deficit reduction beyond 2016. But it appeared progress toward an agreement on a coordinated debt reduction plan to follow up on a 2010 agreement reached in Toronto would be hard to come by.

Rehn said when markets started refusing loans to some euro zone countries at sustainable rates in 2010 for fear they would not be paid back, the euro zone had no other choice but to sharply cut borrowing and spending.

The combined euro zone budget deficit fell to 3.5 percent of gross domestic product in 2012 from 4.2 percent in 2011, pushing the 17 countries that share the euro into recession last year.

This year, the deficit is set to shrink to 2.8 percent, which would represent a more than halving of the euro zone budget shortfall from 6.3 and 6.2 percent of GDP in 2009 and 2010, respectively.

"In the early phase of the crisis it was essential to restore the credibility of fiscal policy in Europe because that was fundamentally questioned by market forces," Rehn said. "There was no choice. Decisive action was taken."

"Now, as we have restored the credibility in the short-term, that gives us the possibility of having a smoother path of fiscal adjustment in the medium-term," he said, noting the United States was now being more aggressive in its deficit cutting than Europe.

"I have been somewhat struck by the perception of the economic and fiscal policy in Europe," Rehn said, pointing to the deficit reduction numbers as evidence Europe had already taken decisions to spread out its deficit cuts.

RESISTANCE FROM WASHINGTON

U.S. Treasury Secretary Jack Lew said on Wednesday that a rush towards fiscal austerity in Europe had worsened the economic situation in some countries, and there was a need to assess the impact of budget cuts on growth and employment.

The United States has also resisted setting specific debt-reduction targets, saying the focus needs to be on lifting growth out of the doldrums.

Canadian Finance Minister Jim Flaherty agreed that more troubled economies should move more slowly towards balanced budgets than others. But he urged the G20 to set hard targets on debt and deficit, and warned the group could lose its credibility if it slackens its resolve.

"It's important for confidence by investors, which leads to more investment, economic growth and jobs," Flaherty said.

One proposal put forth by Canada and India, co-chairs of a G20 working group, is to agree to cut public debt over the longer term to well below 90 percent of GDP, according to a document obtained by Reuters.

Russia, which is hosting the G20 leaders summit in September, has said its goal is to reach a deal by then.

Sergei Storchak, Russia's deputy finance minister, told reporters another possibility would be to let each nation set its own target with a singular goal: "the debt indicators must show an obvious downward trajectory."

ECB GIVING EU SPACE FOR FISCAL REFORM

Rehn noted that the European Central Bank was buying euro zone governments time to get their finances in order with its unambiguous pledge to do whatever it takes to steer the region through its debt crisis.

"We structure efforts to put public finances in order more over time; it is rational policy making at the current juncture," Rehn said.

"There is market confidence to do it now, like you see from the very successful Spanish bond auction today - with the best yields since 2010," he said.

(Additional reporting by Louise Egan and Anna Yukhananov; Editing by Neil Stempleman and Tim Ahmann)

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