PARIS - Across Europe, from profligate Greece to newly straitlaced Ireland, countries are promising deep, painful cuts in public spending even as they face the likelihood of a new recession.
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 reduce spending. 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.”
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 .
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.” The debate is partly about economics . But it is also about leadership, as the European Union struggles to define its mission during the deepest economic crisis in its history.
The Germans insist that the problem is debt. Addressing it means radical cuts in public spending .
France has a softer approach : public spending must expand in times of economic crisis to increase employment and growth, which will gradually cut the deficit through increased tax receipts.
The Germans note that Spain, Portugal, Greece and Italy did not play by the rules of monetary union, drafted largely by Germany. “Wages rose very fast, productivity stayed low and governments went on a spending spree, and that makes Germans angry, because they did the opposite,” said Thomas Klau of the European Council on Foreign Relations.
The Germans are now preaching harsh budget cuts, tax increases, pension reform , a later retirement age and a quick return to government deficits closer to the European requirement of 3 percent of gross domestic product, a far cry from Greece’s 12.7 percent for 2009.
Mr. Fitoussi warns that this risks throwing the Mediterranean countries into deflation, which will create huge political and social pressures and short-circuit Europe’s economic recovery.
While Greece clearly must reform its public sector, market credibility does not require murdering the economy, argues Mr. Fitoussi.
Inevitably the policies to deal with the debt have to balance political and economic realities. Elected governments may promise drastic cuts, but it is not clear that they can stay in office to carry them out.
Greek unions are striking regularly, determined to keep their benefits, and consumer organizations are denouncing a new poverty.
“Can the Greek government survive this?” asked Julian Callow of Barclays Capital. “Spain looks better, but the government hasn’t even begun to get tough on the fiscal side. This is going to have to be a six- to eight-year project to stabilize these debt-to-G.D.P. ratios ? and it gets progressively harder to keep at it.”
By STEVEN ERLANGER
Wolfgang Schauble of Germany, left, and Giulio Tremonti of Italy, both finance minsters, discussed Greece’s debt. / OLIVIER HOSLET/EUROPEAN PRESSPHOTO AGENCY
