Perilous Times
Europe's tough financial measures expose trans-Atlantic rift
By DAVID STRINGER and ALAN CLENDENNING
The Associated Press
Tuesday, June 22, 2010; 5:15 PM
LONDON -- A trans-Atlantic rift is growing over the right medicine for
Europe's financial crisis, with Britain announcing its steepest cuts in
decades Tuesday and Germany defending its own austerity measures after
a warning by President Barack Obama that budget-slashing could threaten
the global recovery.
Britain's emergency budget is the latest in a string of deep cuts in
public spending and reflects new resolve in Europe, after Greece was
pushed to the brink of bankruptcy and even threatened the bloc's
economic union, to tackle debt before worrying about growth.
As leaders of the Group of 20 economic powers prepare to assemble later
this week in Canada, that single-minded focus is worrying the United
States. Obama wrote a letter to world leaders Friday warning against
excessive spending cuts.
German Chancellor Angela Merkel fought back this week, defending her
government's $80 billion savings plan as British treasury chief George
Osborne forged ahead with his own grim budget.
Many European analysts agree that taming deficits is the more urgent
priority.
Obama "has a point, but there are some countries that don't have a
luxury of a choice, they have got to get a grip and start cutting
quickly because the alternative of becoming the next Greece is not
palatable to them," said Jonathan Loynes, chief European economist at
Capital Economics in London.
The British budget aims to sharply reduce record public debt. Shoppers
will pay higher sales taxes, wealthy people will be hit for higher
capital gains taxes and banks will be charged a new levy on profits, a
move already approved by France and Germany. Even Queen Elizabeth II
accepted a freeze in her support from taxpayers.
In Germany, a spokesman for Merkel said she talked by phone Monday with
Obama about a letter he wrote to G-20 leaders in which he cautioned
against hurting the fragile global economic recovery by trimming
spending prematurely.
The letter was seen as a criticism of Germany's plan to reduce its
deficit, but the spokesman said Obama did not pressure Germany to
continue stimulus spending by piling up more debt. The spokesman spoke
on condition of anonymity in keeping with government policy.
Europe's leaders are stuck in a quandary: They must bring down mammoth
debt through spending cuts to ward off economic panic, but the measures
are bound to stunt growth. And it will probably take years to determine
whether they chose the right medicine and dosage.
"My suspicion is that it will be a major drag on the economy for a few
years, and it may be we decide in the future whether they went too
aggressively, but the political and market climate right now is such
that they had no choice," Loynes said.
The realization that Europe is bound to implement spending cuts that
will hurt growth for years has weighed on the euro, pushing it to
four-year lows earlier this month. On Tuesday it traded at about
$1.227, down somewhat from Monday.
Economic stagnation in Europe would hurt the U.S. by crimping its
exports just as America is trying to limp out of its own slump. But in
Europe, Obama's concerns are trumped by a desire to stabilize the
European Union and the euro.
"The EU accords priority to budget-cutting because that is what its
leaders believe is needed to preserve the euro and the political
construction of a united Europe," said Stephen Lewis of London's
Monument Securities.
The new bank fee committed to by Britain, France and Germany will
charge banks based how much they earn to shield taxpayers from the cost
of resolving financial crises. But their call for a global tax is
unlikely to find much support at the G-20 summit.
In a joint statement, the three nations said they wanted to make sure
financial institutions are making a "fair contribution" to reflect the
risks they pose to the financial system and "to encourage banks to
adjust their balance sheets to reduce this risk." Germany is already
drafting legislation for such a tax, and France promised to do so in
its next budget.
Merkel and French President Nicolas Sarkozy are expected to lobby hard
at the G-20 meeting in Toronto for a separate global financial
transactions tax, but Loynes said there is little chance it will be
approved. Their efforts are aimed at shoring up political support at
home, he said.
Obama expressed support this week for a proposal that passed the
Spanish parliament Tuesday to reduce labor costs and boost hiring.
Spain had already pushed through an austerity plan to show markets it
will not need a bailout to manage its debt, as happened with Greece.
But not everyone is convinced the Spanish reforms will actually lead
companies to hire. Europe's fourth-largest economy needs jobs
desperately after crawling out of two years of recession. Unemployment
now stands at 20 percent in the nation of 45 million.
Bank of Spain governor Miguel Fernandez Ordonez welcomed the labor
reforms as a good first step but said they do not go far enough.
Sandalio Gomez, professor of management at IESE Business School in
Madrid, said the government is trying to conceal that it is making it
easier and cheaper to lay off workers - something it had repeatedly
said it would not do.
"They've missed a perfect opportunity - and there are few like this -
to transmit confidence to the labor market, a push forward that would
allow jobs to be created," he said.
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Clendenning reported from Madrid. Associated Press Writer Juergen Baetz
in Berlin contributed to this story.