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Europe eyes merits of boosting growth to cut debt

By Sarah Dilorenzo

Associated Press

Published: Friday, Sept. 9 2011 12:40 p.m. MDT

German Chancellor Angela Merkel, right, speaks to Finance Minister Wolfgang Schaeuble during the budget debate in the German parliament Bundestag in Berlin Tuesday, Sept. 6, 2011. Schaeuble presented Germany's 2012 budget to parliament that foresees lower borrowing. The draft budget, which was published and approved by Chancellor Angela Merkel's Cabinet in July, sees total spending at euro 306 billion (US$ 432 billion), compared with euro 305.8 billion this year.

dapd, Michael Gottschalk, Associated Press

Enlarge photo»

MARSEILLE, France — After months of talk that Europe can only be saved by slashing its spending, a growing chorus of voices is calling for a new tack, encouraging governments to instead stimulate growth — even if that means spending money.

As a slowdown in the global economic recovery threatens to undo Europe's austerity efforts, experts are reviving a fundamental debate on how best to dig out of the crisis of high debt and low growth.

One view has been to cut debt regardless of short-term consequences on growth. But as slower growth eats away at those austerity plans' progress, economists have been reconsidering the merits of boosting growth to lower debt.

Germany, which is shouldering much of the cost of propping up its weaker eurozone neighbors, has been one of the most fervent advocates of spending cuts. The European Central Bank has also chimed in, hounding countries like Italy to pass austerity measures as a sign they're worthy of receiving help.

Even European countries like France that are in better shape have been trying to calm skittish investors — and drive down their borrowing rates — by promising to cut costs.

But those measures have drawn fierce criticism that they risk driving the recovery into reverse and heap more pain onto those who can least afford it.

Instead, the U.S. and others have a different answer: It's growth, stupid.

As President Barack Obama unveiled a huge plan to boost job creation, U.S. Treasury Secretary Tim Geithner called on other governments to strengthen economic growth as he prepared to meet officials from the world's most developed economies in Marseille, France, on Friday.

The argument put forth by Geithner and others is that the best deficit-reducer is growth: When the economy is humming, it offsets spending and drives down both the size and the proportion of deficits. Rather than trying to scrimp their way back to prosperity, world economies need to spend money to make money.

"The best strategy for reducing public debt is to promote growth-enhancing fiscal policies," the U.N. Conference on Trade and Development recommended in a report released this week.

What's more, many argue that the danger of too much austerity is that it can put a stranglehold on growth by weighing companies down with taxes and making it harder for them to borrow money and hire more workers. That will only feed a viscious cycle of indebtedness.

Greece is one example. It agreed to slash costs in order to receive billions in bailout funds, and Luxembourg Prime Minister Jean-Claude Juncker who also chairs the group of eurozone finance ministers insisted on Wednesday that Athens wouldn't get its next tranche of loans unless it kept those commitments. If Greece doesn't get those loans, it could default.

But its austerity plan is proving futile as it slips deeper into recession: It now expects its economy to contract by 4.5 to 5.3 percent this year, far more than the 3.5 percent drop in GDP that was forecast in May.

Charles Wyplosz, a professor of economics at the Graduate Institute in Geneva, says it's unreasonable to ask any economy in recession to reduce its deficit.

"Governments have to support growth before they think about reducing deficits," he said. "It's not the time to punish countries. It's the time to stop the crisis."

Athens appears to be slowly coming around to that way of thinking, though all its decisions are reviewed and approved by its bailout creditors. Finance Minister Evangelos Venizelos now says his main concern is reversing the economic contraction. The opposition has long called for tax cuts — rather than the increases pushed through by the government to secure bailout funds — in order to restart the economy.

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