THE European Commission president has admitted austerity is not working and opened the possibility of quantitative easing -- or printing hundreds of billions of euro.
The commission's most senior official has given the strongest signal yet that the Europe-wide policy of spending cuts and tax hikes could be relaxed in an effort to kickstart economic growth.
It comes as the Department of Finance admitted Michael Noonan would have €1bn of leeway available to potentially soften the Budget next October.
New figures also show Ireland's budget deficit was better than previously thought and well ahead of the target under the bailout deal.
In a speech in Brussels, Jose Manuel Barroso said the EU should place a greater emphasis on policies that stimulate growth and less on so-called austerity measures, such as cutting government spending.
"While I think this policy (austerity) is fundamentally right, I think it has reached its limits," the commission president said.
"A policy to be successful not only has to be properly designed, it has to have a minimum of political and social support."
But austerity is working in Ireland, he said, adding: "It is a painful programme, but it is working."
Government sources said Mr Barroso's speech was "significant", as it may signal a shift in EU policy.
"In terms of the troika, it moves the commission closer to the IMF," a senior source said.
"That strengthens the hand of the Government in terms of negotiations. The leaders of two of the three elements of the troika are saying there has to be more flexibility."
"But it is also a question of what he is going to do to back it up."
Mr Barroso's speech is being seen as a sign that bigger countries such as France and Spain could now be given longer to get their spending under control.
Currently, all European governments are committed to bringing budget spending deficits to a maximum of 3pc of the size of their economies by 2015.
Lack of popular support means austerity programmes may start to be scaled back.
"We have to have tailor-made solutions for each individual country. We cannot apply a one-size-fits-all programme to the European countries," Mr Barroso said.
However, Mr Barroso's comments on austerity were tempered by those from German Chancellor Angela Merkel in Berlin – who said Eurozone members must be prepared to surrender more authority to European institutions if the continent was to avoid decline.
Europe must have "the last word", Mrs Merkel said, in the latest signal that Berlin backs stricter Europe-wide controls over national budgets.
"We need to be ready to accept that Europe has the last word in certain areas. Otherwise we won't be able to continue to build Europe," she added.
European leaders are due to meet in June to discuss moving towards fiscal union.
In further good news, Ireland's budget deficit was 7.6pc last year, according to new figures released yesterday.
It is down from a peak of 30pc in 2010 and well ahead of the target under the bailout deal to cut the overspending to 8.6pc in 2012. The deficit is expected to fall to 7.4pc this year.
The Department of Finance said it still plans to bring overspending under the 3pc target that was set by Europe within two years. But it conceded yesterday that the Government now has an extra €1bn to play around with when it is putting together the October Budget.
A department spokesman told the Irish Independent that the €1bn saving from the promissory note deal could provide some flexibility, but stressed that it is up to the Government.
"There is €1bn that's sitting out there by way of an adjustment," he said. "It creates a bit of flexibility that could be used.
"That's a matter for the Government. They wouldn't take a decision until later in the year, until closer to the Budget."
The Government must seek approval from the troika for any easing in October's Budget, so a change of heart in Europe could have a direct importance.
The financial situation was boosted by better-than-expected budget figures for 2012 and the latest European deal that will give us more time to repay bailout loans.
Mr Barroso's comments are the latest sign that a wider shift in economic thinking is under way.
The International Monetary Fund last week said the UK should ease back on its austerity programme.
A study published last week by three economists at the University of Massachusetts found basic flaws in an influential paper by US economists Carmen Reinhart and Kenneth Rogoff that said high government debt levels hurt economic growth.
Political support is also disappearing quickly.
Spanish finance minister Luis de Guindos said on Sunday that new budget plans to be presented later this week will focus on economic growth and reduce the stress of spending cuts.
New figures show that France and Spain fell short of their budget deficit goals last year.
France's 2012 budget deficit was 4.8pc of economic output, against a 4.5pc target.