On the eve of a meeting of Group of Seven finance ministers and central bankers in the U.K., Schaeuble told a conference in London there’s "enough room to maneuver" for euro-area governments to respond to the currency bloc's recession.

Such comments reflect the recent shift in stance from Europe's powerhouse economy, which had previously hailed austerity as the main route to prosperity for the debt-strapped region. Forcing the rethink are signs the continent's slump is outlasting forecasts, driving unemployment to record levels and prompting foreign calls for more policy support.

Europe needs to strike the "right balance" between growth and austerity, U.S. Treasury Secretary Jacob J. Lew said this week. "We have had some success, I think, in urging them in the right direction."

The euro-area economy has contracted for five quarters, and the recession probably extended into the first three months of this year, according to a Bloomberg News survey of 19 economists. The European Commission sees gross domestic product falling 0.4 percent this year.

'Three-Speed Recovery'

The G-7 officials start a two-day meeting in Aylesbury, north of London, Friday. They may not release a formal communique, a Canadian Finance Department official said Thursday.

Speaking on the same panel as Schaeuble, International Monetary Fund Managing Director Christine Lagarde repeated that the global economy is in a "three-speed recovery," in which emerging markets are leading the way, followed by healing economies such as the U.S., with laggards including Europe and Japan bringing up the rear.

"Things are better this year than they were last year, but we’re not out of the woods yet," Canadian Finance Minister Jim Flaherty said. U.K. Chancellor of the Exchequer George Osborne said "the priority is now to nurture the recovery."

Evidence has grown in recent weeks that Europe is willing to cool the ardor for austerity that marked its response to the three-year debt crisis. France and Spain may be given two extra years to meet European Union deficit goals, while other nations, like the Netherlands, Poland and Slovenia, may get one additional year.

Record Unemployment

The new Italian government is pledging to unwind some of the budget-cutting projects undertaken by its predecessor, and Spain has outlined a plan to spur investment in companies.

Highlighting the eurozone's economic weakness, unemployment reached 12.1 percent in March, with a level of 26.7 percent in Spain, according to the EU's statistics agency. Greece reported 27 percent unemployment in February Thursday.

"The end of the dogma of austerity" as the only tool to fight the debt turmoil is over, French Finance Minister Pierre Moscovici said May 5.

Indicating he still sees value in the original approach, Schaeuble said budget deficits have been trimmed in many eurozone states and bond yields have fallen. He still sees a need for countries to improve the structures of their economies.

"A crisis in confidence in the European economy is not solved, but a crisis of confidence has diminished," he said.

Flaherty said all governments needed to find "a balance" between ensuring fiscal order in the medium term and providing short-term support for growth. "This isn't a single horse that one must ride; you can do both," he said.

'Measured Pace'

The U.K. government indicated no plans to slow its own fiscal consolidation program, which has drawn warnings from the IMF for potentially being too fast. "We need to go on cutting that deficit," Prime Minister David Cameron said Thursday. "We’re not doing this at an irresponsible pace. We're doing it at a sensible, measured pace, but it absolutely has to be done."

One area that's still subject to disagreement at the G-7 is a proposed financial-transaction tax in at least 11 EU countries. Cameron called it a "mistake for Europe" and Flaherty labeled it a "tax on the customers of banks." Schaeuble said there is a "long way to go" before a decision is made.