The meeting of eurozone finance ministers in Brussels was Friday was a historic event. It was the first such gathering under the new rules that allow ministers to examine one another's budgets and national accounts to see if the agreed targets to cut budget deficits are being met.
Not surprisingly only two countries -- Germany and Estonia -- of the 17 were given a clean bill of health. Finland, Luxembourg and Malta were solemnly warned by Economic Affairs Commissioner Olli Rehn that their tax-and-spending plans were "in serious risk of non-compliance."
Rehn and his team of civil servants in Brussels had drawn up a series of budget recommendations for the 17 countries in the eurozone. It was the first real test of the currency union's new stability and growth new pact on cutting budget deficits.
Their work had made several of the more troubled countries nervous. Italian Prime Minister Enrico Letta had sounded the alarm last week that "ayatollahs" in Brussels were aiming to impose yet more austerity measures on the weak Italian economy.
In the event, the budget control process turned out to be a damp squib. Rehn's team from the commission gave Italy a temporary pass, accepting that the country needed more time to work through its privatization program and for Italy's own government to conduct a thorough new review of its spending plans in the hope of finding more room for cuts. Rehn's team said that in principle it wants another 0.4 percent of gross domestic product trimmed from Italy's budget.
"I would expect that the Italian expenditure review will lead to long-term structural changes. Italy's two biggest problems are a lack of economic competitiveness and the high level of public debt," Rehn said, echoing previous statement from previous economics commissioners who had given Italy more time, only to see it effectively wasted.
Another troubled country, Spain, was also given more time, after the Madrid government said that it had proposed new spending controls since it had drawn up the draft budget from which Rehn's team had worked. Rehn's group had recommended further cuts of 0.2 percent of GDP.
"The important thing was that every country fundamentally agreed with the process and with the commission's own findings on their budgetary plans. And each country made a serious effort to comply so nobody was sent back to the drawing board," commented one EU official, speaking not for attribution.
The 17 finance ministers released a statement after the meeting in which they agreed that they "broadly concur with the commission's opinions and analysis."
"We scrutinized each others' budgets and discussed quite openly what the risks were," Eurogroup President Jeroen Dijsselbloem, who is also the Dutch finance minister, said.
"Europe is very committed to fiscal adjustment," Dijsselbloem added, stressing that the average deficit level in 2014 would fall to less than the 3 percent limit for the first time since the crisis began in 2008. But that average hides the gap between countries that are in surplus or in balance, like Germany and Estonia, and those who budget deficits remain stubbornly high.
The problem is that cuts in government spending usually reduce future growth and GDP. Recent research by the International Monetary Fund has found that $100 million in cuts can reduce future GDP by twice that amount. What Europe really need now is growth but the European Union's focus on budget deficits makes growth harder to achieve, which why the eurozone as a whole is still in recession and overall government debt continues to mount.
But at least the rules are now being relaxed into what IMF officials have called "austerity lite." The cuts are less ferocious than they were and governments are being given more time. And with the European Central Bank promising to do "whatever it takes" to keep the euro alive, the markets are longer demanding double-digit interest rates to lend money to Italy and Spain.
Broadly, key eurozone leaders, such as Germany's Angela Merkel, have quietly dropped their initial tough demands for short, sharp cuts. They now accept that it will be a long haul to restore fiscal balance and to enact the structural reforms to liberalize Europe's sclerotic labor markets and to trim its various welfare states.
This means very low growth for Europe over the next few years, or even stagnation if global demand continues to falter as China and other emergent markets like Russia and Brazil see their own growth rates plummet. Europe is buying time it can ill afford.