Experts: Austerity May Go Overboard in Europe

Austerity measures such as tax hikes and public-sector layoffs imposed in debt-ridden southern European countries may be going overboard, experts say, pointing out such steps will cut into growth.

Countries such as Greece have agreed to undertake tough austerity measures in exchange for aid or investor turnout at bond auctions, although layoffs and tax hikes designed to streamline the public sector and ease debt burdens mean less tax revenues down the road.

Less people working means less money coming back in. Plus, a small government means less economic output as well.
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"Every government in Europe with the exception of Germany is bending over backwards to prove to the market that they won’t hesitate to do what it takes," says Charles Wyplosz, a professor of economics at the Graduate Institute of Geneva, The New York Times reports.

"We’re going straight into a wall with this kind of policy. It’s sheer madness."

(Getty Images photo)

Europe is already on the road to recession, many say.

"Europe is likely to have a meaningful recession in 2012," says Tobias Levkovich, Citigroup’s chief equity strategist, The New York Times adds.

While U.S. businesses may not be directly exposed to problems in Europe, protests stemming from austerity measures could spark worries in U.S. capital markets.

"Powerful street protests could bring it back to the front pages," Levkovich says.

"We've seen episodic crises in Europe over the past two years. It's a recurring event."

Greek Prime Minister Lucas Papademos told the country in a New Year's Eve address that Greece must prepare for another tough year that includes sticking with austerity measures.

"A very difficult year is ahead of us. We must continue our efforts with decisiveness, to stay in the euro, to make sure we do not waste the sacrifices and do not turn the crisis into an uncontrolled and disastrous bankruptcy," Papademos said, Reuters reports.