Europe may accelerate a shift away from its austerity-firstagenda this week as the new Italian government changes course and aGerman-Spanish investment pact underscores a renewed focus oncombating record unemployment.

Yesterday's swearing in of Italian Prime Minister Enrico Lettaends a political deadlock nine weeks after voters rejected thecountry's budget-cutting course. German Finance Minister WolfgangSchaeuble, a champion of austerity, will travel to Spain today tounveil a plan aimed at spurring investment in Spanish companies.Later this week, the European Central Bank may also cut interestrates at a meeting.

“You have to react to economic developments — we do so inGermany,” Schaeuble told members of Chancellor Angela Merkel'sChristian Democratic Union in Berlin last week. “We are notbureaucratic; we are not stupid.”

The new Italian government's pledges to dismantle parts of thebudget-cutting project undertaken by ousted premier Mario Montiopens a new front in the debate over the German-led policy ofausterity to overcome the bloc's debt crisis. As the 17-member euroarea remains mired in recession, European leaders are joiningglobal critics in urging the bloc to devote more resources toboosting economic growth.

Italian bonds jumped today, with the 10-year yield falling 8basis points to 3.98 percent. The bonds have gained for fourstraight weeks, with the benchmark yield reaching the lowest since2010 last week. As the two-month political gridlock ended,speculation increased about the ECB's possible rate cut.

Letta of the Democratic Party, at 46 the third-youngest Italianleader since World War II, came into office after sealing analliance with former premier Silvio Berlusconi and recasting thecoalition that stood behind Monti.

The premier's swearing-in ceremony was marred by a shootingoutside the premier's office in central Rome in which two policeofficers were shot by a lone gunman.

One of the first tests of the new partnership may be a propertytax that three-time premier Berlusconi has vowed to eliminate.Berlusconi said this weekend that Letta had agreed to abolish themeasure on first homes and reimburse last year's payment, a move hesaid may cost about 8 billion euros ($10.4 billion). Letta has notconfirmed the agreement and his first Cabinet meeting didn'taddress it, according to his office.

Scrapping the unpopular tax would mark a challenge to Europeanleaders' preference for fiscal belt tightening at a time when ithas come under increased criticism for compounding economicdistress. European Commission President Jose Barroso spurred adebate last week when he said that while consolidation isnecessary, budget-cutting had run its course.

Policy Limits

“We are reaching the limits of the current policies,” Barrosotold an audience in Brussels a week ago.

While the comments drew ire from German lawmakers in Merkel'scoalition, Germany's government said that Barroso's position was inaccord with Berlin and stressed that Europe must be flexible in howit responds to economic distress.

German Deputy Finance Minister Steffen Kampeter said last weekthat the bloc's budget rules “aren't rigid.”

Joachim Fels, co-global head of economics at Morgan Stanley inLondon, yesterday cited “accumulating signs that austerity isyesterday's policy, at least in Europe” as a signal of optimismabout a global recovery in the second half.

Schaeuble offered the latest signal that Merkel's government isadjusting its crisis stance in comments late last week. He saidhe'll use today's meeting in Madrid with Spanish Economy MinisterLuis de Guindos to push for an investment program that sidestepsthe EU Commission.

The plan, announced on the same day that Spanish Prime MinisterMariano Rajoy said he was seeking a two-year extension to meetingEU deficit rules, could serve as a model for other countriessuffering with battered economies, Schaeuble said.

“If the economy deteriorates, you don't reinforce the economicdownturn through deeper cuts,” he said.

The depth of Europe's economic woes was on display last week.Unemployment in Spain rose to more than 27 percent in the firstquarter, the highest since at least 1976, with more than 6 millionpeople in the country out of work for the first time, thegovernment in Madrid said April 25. Joblessness in the euro area asa whole stood at a record 12 percent in February.

The ECB may also pull its weight. The Frankfurt-based bank willlower its benchmark rate to a record 0.5 percent when centralbankers meet on May 2 in Bratislava, according to the median of 69economist estimates compiled by Bloomberg.

Job Cuts

To be sure, austerity measures continue in crisis-stricken euronations. Greek lawmakers passed a bill late yesterday includingplans to fire 15,000 workers by the end of next year as thegovernment of Prime Minister Antonis Samaras cleared the latesthurdle to receiving international aid payments.

As Merkel approaches national elections in less than fivemonths, softening her stance on indebted nations in the euro areawill pose a challenge. Last week she again defended scaling backbudgets.

“We always talk a lot about growth in Europe, but we have to askourselves what we mean by that,” she told savings banks officialsin a speech in the eastern city of Dresden. “Growth only on thebasis of state financing won't make us more competitive inEurope.”

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