Europe’s Debt Solutions May Be Superior

From Reuters (link and link) here is some happy talk from Europe about how they’re going to surmount their fiscal problems.

France

Euro zone trade unions are preparing for possible confrontations in the coming week if governments impose austerity measures or labor reforms unilaterally.

But ministers made clear they were ready to take unpopular steps to prevent the Greek debt crisis spreading to their economies, although doubts are growing about whether the Spanish government in particular has enough support to get its way.

Budget Minister Francois Baroin indicated on Sunday that France should not take for granted its AAA rating, which allows Paris to borrow relatively cheaply on international markets and finance its big budget deficit.

“The objective of keeping the AAA rating is an objective that is a stretch, and it is an objective that, in fact, partly informs the economic policies we want to have,” Baroin said.

“We must maintain our AAA rating, reduce our debt to avoid being too dependent on the markets, and we must do this for the long term,” he told Canal+ TV in an interview.

Germany

Berlin’s budget problems are less severe but Finance Minister Wolfgang Schaeuble signaled at the weekend that Germans may have to stomach tax rises as well as spending cuts.

Chancellor Angela Merkel’s government is considering raising value-added tax (VAT) to the full rate of 19 percent on certain items that currently benefit from a lower rate of 7 percent, coalition sources told Reuters on Friday.

“If you abolish tax breaks, some will say that’s a tax increase. At the end of the day, it’s about having a sensible and balanced policy,” Schaeuble told the Bild am Sonntag paper.

“And let’s bear in mind that cuts on social spending hit those in the country with less money.

Germany‘s budget deficit is expected to exceed five percent of GDP in 2010, modest by current EU standards but well above the bloc’s limit.

Spain

Spain’s Socialist government is battling to prove to nervous markets that the euro zone’s fourth largest economy will not go down the same path as Greece. But with political opposition growing at home, its ability to push through reforms is limited.

Weekend opinion polls put Prime Minister Jose Luis Rodriguez Zapatero’s government far behind the opposition, and indicated that many voters believe he will have to call early elections as support for a 2011 austerity budget will be hard to muster.

“The government faces not only an economic crisis but a political crisis too, because the way it’s governing is not good enough,” said Angel Laborda, an economist at Spanish savings banks consultancy FUNCAS. “I believe that early elections will be called, sooner or later.

A deadline for the government, trade unions and business to agree on labor reforms, aiming to cut unemployment and make the Spanish economy more competitive, looms in the coming week.

Already a May 31 deadline has been pushed back a week. If the talks fail, the government says it will propose its own changes by June 11, risking a confrontation with the unions.

Italy

The unions, traditionally close to the Socialists, have said they will respond to any imposed reform with a general strike.

Unions across the continent are preparing their defenses. The European Trade Union Confederation will consider its response to austerity measures in Brussels on June 1 and 2.

But Italy‘s largest trade union already aims to force Rome to modify its austerity budget with a national strike, probably on June 25.

Greece

Greece will not need additional measures, especially ‘painful’ measures. I see only one option ahead, delivering on our targets with consistency,” Finance Minister George Papaconstantinou told Sunday’s Eleftherotypia newspaper.

Greece‘s economy, which makes up about 2.5 percent of the euro zone, is expected to stay in recession for a second year in 2010 after a 2 percent slump in 2009.

The Bank of Greece projects the economic downturn will deepen, with GDP seen contracting by 4 percent this year, as tax increases and cuts in wages and pensions take a toll.

“The recession will be deepest in 2010 and thereafter there will be a gradual recovery,” the minister told the paper. “I remain optimistic and believe we will recover fast.”

The minister reiterated the socialist government’s stance that debt restructuring was not an option, now or in the future.

“Debt restructuring would be disastrous for the country’s credibility. It would lead to its marginalization from capital markets, to even more belt-tightening and a very deep recession,” he said.

If, and I admit it is one gigantic if, the European countries are able to engage in meaningful structural reforms as a means of tackling their debt problems then the possibility exists that they come out the other end of this crisis in much better long-term shape than the US. Our strategy of relying on massive monetary and fiscal stimulus to jump start the economy with an end goal of growing our way out ignores the structural imbalances that have taken hold.

The fly in the ointment for the Europeans will arise if they end up relying solely on increasing taxes to cure their deficit issues. Already high tax countries, saddling their economies with higher taxes will likely ensure permanent low growth economies. They have to attack their embedded spending issues.

Give the Europeans credit for at least talking a more realistic game than we have. Now they have to make it work and if they do we’ll have some serious catching up to do.

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