To protect the value of the euro, satisfy investors and appease Europe’s economic taskmaster, Germany, the region’s most heavily indebted nations consider that they have no choice but to slim down. Reviving economic growth and reducing unemployment must wait until countries put their fiscal houses in better order, the thinking goes. But some argue that Berlin is pressing too hard, and that the region’s new fixation on debt has created a “cult of austerity” that could make it harder to recover from the slump. Drastic budget cuts, if carried out as promised, could set off deflation, send already high unemployment rates surging, bring governments down and even create popular opposition to the euro, critics say.
The pressure “will impose terrible strains on the government and society” for years to come, said Jean-Paul Fitoussi, professor of economics at the Institut d’Etudes Politiques in Paris. “It’s self-defeating, because if you have austerity and deflation in Greece, Portugal and Spain, then the European economy will not recover; firms will fail and jeopardize the banks.”
Opposition to austerity is spoken softly in official circles, as political leaders fret that markets will punish countries that show weak resolve to reduce debt. But Germany, which has insisted on steep cuts in public spending in the most indebted nations, is facing criticism for harping about the dangers of debt without doing more to support growth, mainly by buying more from its neighbors. The French finance minister, Christine Lagarde, warned Berlin that it must raise its domestic demand to help partners in trouble. Could Germany, with its high savings and big trade surplus, “do a little something?” she asked in an interview with The Financial Times. “It takes two to tango. It can’t just be about enforcing deficit principles.” Read full article in the International Herald Tribune...
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Commission shakes finger at member states
In announcing that public finances are in worse shape than anticipated, "Brussels has poured cold water on the optimistic recovery scenarios of several European countries," writes Le Figaro. The European Commission, which released its assessment of budget deficit reduction programmes for 14 member states on March 17, lowered its forecasts for France, the UK and Spain, the French daily reports. The Commission believes those countries are counting too heavily on economic growth to reduce their deficits and warns that "the strategy does not leave any safety margin if economic developments turn out worse than projected".
The report accused London of not doing enough to gain control of its deficit, while noting that the projected 2011 GDP growth rate for France has been downgraded from 2.5% to 1.5%, and that Spain's public deficit currently amounts to 11.4% of its GDP. Le Figaro notes "Germany was not spared" in the assessment, which called Berlin's strategy insufficient for reducing debt and lowering its deficit to 3% of GDP by 2013.
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