To keep its debt crisis from mushrooming out of control, the European Union is imposing harsh cutbacks on millions of ordinary people in debt-plagued countries like Greece, Ireland and Portugal.
But some economists think cutbacks right now are a mistake that might tip Europe into a dreaded double-dip recession.
How, skeptics ask, will Europe’s barely-there recovery withstand the loss of stimulus from sudden, steep austerity measures demanded by the EU? So far the pain includes cutbacks and freezes in teachers’ and nurses’ salaries, higher retirement ages and heavier taxes on everything from incomes to cigarettes and fuel.
Europe is barely expanding, with only 0.1 percent growth in the fourth quarter in the 16 countries that use the euro, leaving a renewed slide into recession impossible to rule out. And the recession is still on in several countries facing the cuts such as Greece, Ireland and Spain.
“This premature fiscal tightening is the route to the Second Great Depression” — or at the very least, a long period of economic stagnation, warned Simon Johnson, a professor at MIT’s Sloan School of Management and a former chief economist at the International Monetary Fund.
Yet markets are leaving EU leaders with little room to maneuver.
Fears of a possible downgrade of Greek debt by ratings agencies sent European stocks lower Thursday and pushed the euro down 0.4 percent to $1.3484, not far off its nine-month low of $1.3444 hit earlier this month and well off its most recent peak of $1.51 from November. Federal Reserve Chairman Ben Bernanke told lawmakers Thursday that the central bank is looking into the use by Goldman Sachs and other Wall Street firms of a sophisticated investment instrument to make bets that Greece will default on its debt.
Robbie Cullen can see both sides of the coin. As a tax collector, he’s in the front line of Ireland’s battle to bring its runaway deficit under control. But as a divorced dad working two jobs, his own wallet is already at breaking point.
“The debt we’ve run up as a nation is just unbelievable. A tsunami could hit Ireland and cause less damage,” said a red-eyed Cullen, who shifts every day from his civil servant job to moonlighting as a taxi driver in Dublin.
It’s a choice he couldn’t have imagined a few years ago — before the government’s emergency budgets cut his overtime, froze his salary, raised his income taxes and boosted his workload as departing colleagues weren’t replaced.
“I can’t even keep up with my own debts, never mind the nation’s,” Cullen said, shopping for cut-rate sausage at a discount supermarket he disdained to visit in better times. “I’ve got to spend 30 hours a week taxiing just to break even. Something else has got to give. I can’t give any more.”
Despite the pain its cutbacks are imposing on ordinary people, the conservative Irish government of Prime Minister Brian Cowen has won praise from the European Union and the bond markets for its efforts to cut debt, prices and salaries.
The European Union is demanding austerity in defense of its common currency, which can be undermined by big deficits and would be devastated by a Greek default. The strategy, led by Economic and Monetary Affairs Commissioner Olli Rehn, seeks to reverse deficits spiraling far beyond the euro zone’s rule of 3 percent of gross domestic product — Greece’s is expected to hit 12.7 percent, Ireland’s 12.5 percent, Spain’s 11.2 percent and Portugal’s 9.3 percent. (AP)
