Tags: EU | Europe | Age | Of | Austerity

Europe Faces an Era of Government Spending Cuts

Tuesday, 25 May 2010 04:17 PM EDT

Wearing her diamond-studded crown, Queen Elizabeth II arrived at Parliament in a gleaming horse-drawn carriage to deliver a message of austerity and making do with less in troubled economic times.

The speech laid out the agenda for Britain's new coalition government — but its theme of slashing a record deficit and spurring fragile growth resonated across Europe's ailing economies.

Governments across the continent announced more budget cuts Tuesday, even as their stock markets and the euro were beaten down by investors fearful of stagnant growth and soaring deficits. Even regional powerhouses like France and Germany, with relatively vibrant economies, are beginning to clamp down on spending.

There are no easy solutions. Belt-tightening is an urgent priority but comes with the real danger of stifling growth and launching a double-dip global recession that some experts fear could bring about a "lost decade" like one Japan experienced in the 1990s.

Yet failure to clamp down could bring on bond market skepticism or even panic — and a spiral of higher and higher borrowing costs as a result.

Also at risk are some of Europe's cherished welfare protections — from retirements in the early 60s to months or years of unemployment payments that come close to working wages.

"The difference between medicine and poison is in the dose in which the medicine is provided," said Asghar Zaidi, research director for European Centre for Social Welfare in Vienna. "The budgetary consolidation is important, and justified, in its own right, but a delicate balance will have to be drawn between welfare goals and fiscal austerity."

For now, governments are coming around to the view that ballooning deficits are the larger evil.

Officials in Rome announced Tuesday that $30 billion in budget cuts are needed to stave off a Greece-style meltdown. In Denmark, so far largely insulated from the worst of the recession, the government laid out a $4 billion austerity plan that includes lowering welfare benefits and delaying planned tax reductions to meet European Union requirements to keep the budget deficit below 3 percent of economic output by 2013.

The Danish government is also restricting child allowance and postponing plans to reduce taxes for high-income earners.

Germany, which touts its conservative fiscal management as a model for Europe, will decide next month just how to cut at least 3 billion euros ($3.75 billion) from the budget, part of a push to narrow the gap between spending and income by about 10 billion euros a year from 2011 to 2016. The government is suggesting that it could make fresh cuts to unemployment benefits that now include giving unemployed Germans under age 50 about 60 percent of their last salary before taxes, for up to a year.

Unions in France are organizing a day of protest marches and strikes Thursday to demand protection of wages and the retirement age, now at 60 for many workers who can retire with 50 percent of their average salary and extra funds for retired civil servants, those with three or more children, veterans and others.

The conservative French government is pushing for changes, and a parliamentary debate is planned for September.

"The first priority is to reduce the deficit and restore economic growth," the queen said, reading aloud the short and somber speech written by government officials at the opening of Britain's new session of Parliament. Public sector net borrowing for the fiscal year ending April 5 was 154.5 billion pounds ($233 billion).

Ahead of the speech, Prime Minister David Cameron's Cabinet gave details of an initial $9 billion of cuts — including a curb on official cars and drivers for Cabinet ministers.

It's been an unrelenting year of profoundly bad news for Europe, beginning when Greece's new government announced in October that its predecessor had concealed a massive budget shortfall and raised the country's deficit projection from 3.7 percent of GDP to a stunning 12.5 percent and then to 13.6 percent. Fears that Greece could not repay the debt sent interest rates on its bonds soaring. As the European Union played down the danger to the rest of the continent and argued over how to respond, a crisis of confidence in the broader European economy ignited.

Markets were only momentarily soothed by a 110 billion euro bailout of Greece involving the country's 15 partners in the euro zone and the International Monetary Fund. Even a near $1 trillion rescue package announced soon after to support other euro zone economies failed to dampen concerns about Europe's shaky finances.

Though the measures have helped diminish fears of an imminent spate of defaults, economists and investors are still deeply skeptical that enough is being done to transform the lumbering bureaucracies and sclerotic work rules in place in much of Europe — particularly in Spain, Portugal and Italy. More broadly, they fear the EU will never figure out how to address trade imbalances among industrial powerhouses like Germany and the tourism-dependent nations along the Mediterranean.

Some think it's a lost cause, that nothing can be done within the confines of the euro currency, especially if Germany doesn't ramp up consumption.

"Euroland is destined to repeat Japan's lost decade experience unless it breaks up fast," said Diana Choyleva, an analyst at Lombard Street Research.

Lawmakers in both chambers of Spain's Parliament agreed Tuesday to cut their base salaries by 10 percent, joining civil servants in central government ministries in receiving less pay as the country struggles to reduce a deficit equivalent to 11.2 percent of GDP.

A nationwide federation of municipal governments also announced pay cuts of as much as 15 percent for mayors and other local elected officials.

Many observers are skeptical that Spain is doing enough to avoid a Greece-style crisis. The IMF urged the country Monday to enact speedy and far-reaching economic reforms, saying its recovery from financial crisis was weak and it should urgently and radically reform a labor market that is not easing "structurally high and excessively cyclical" unemployment.

Spain has one of the highest jobless rates in Europe now at more than 20 percent, despite having been the continent's top job creator just two years ago.

In Britain's House of Lords, the queen sat on a gilded throne in the House of Lords and wore the Imperial State Crown — which travels in a separate horse-drawn carriage to Parliament and is studded with 2,000 diamonds — as she outlined the legislative program for the next 18 months. The policy slate promises sharp curbs on public spending and an overhaul in regulation of the financial sector.

Hundreds of people lined streets outside Parliament to gawk at the show of pomp and power: mounted cavalry, Yeoman warders — sometimes known as "Beefeaters" — and glittering carriages parading by.

Ahead of the speech, there was a fillip for the new government — as the Office of National Statistics raised its estimate of the increase in GDP in the first quarter from 0.2 percent to 0.3 percent. But the report also highlighted a continuing imbalance in the economy: government consumption rose 3.1 percent during the year while household spending actually fell.

In a House of Commons debate after the speech, Cameron — leader of the Conservative Party — acknowledged there must be tight, and likely unpopular, curbs on public expenditures. "The whole point is we're getting to grips with spending so we don't have to put up taxes," said Cameron, who sat beside deputy prime minister Nick Clegg, leader of the Liberal Democrats.

He said ousted leader Gordon Brown and his Labour Party had left the nation's finances in disarray, "leaving Britain with a deficit that is bigger than Greece's."

© Copyright 2024 The Associated Press. All rights reserved. This material may not be published, broadcast, rewritten or redistributed.

Wearing her diamond-studded crown, Queen Elizabeth II arrived at Parliament in a gleaming horse-drawn carriage to deliver a message of austerity and making do with less in troubled economic times.The speech laid out the agenda for Britain's new coalition government but...
Tuesday, 25 May 2010 04:17 PM
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