Tuesday, June 8, 2010

Europe Tightens Its Belt


The recent moves to cut fiscal spending by some of the major European governments hasn't received as much attention in the U.S. financial press as I believe it should.

Governments around the world are facing the same problem: do they cut spending/raise taxes in an effort to reduce their budget deficits? Or do they propose more government stimulus - new spending/cut taxes - with the idea of growing their way out of their fiscal problems?

Most governments seem to be moving to the first alternative.

Yesterday, for example, the German government proposed large cuts in its federal budget:

The German government put together the largest austerity package since World War II on Monday, with spending cuts and new business levies aimed at saving 80 billion euros by 2014. Chancellor Angela Merkel says Germany, as Europe's largest economy, must set an example.

Radical Cutbacks: German Government Agrees on Historic Austerity Program - SPIEGEL ONLINE - News - International

And then there was new British Prime Minister David Cameron solemnly warning his country that severe cutbacks were coming:

Prime Minister David Cameron said Monday that Britain’s financial situation was “even worse than we thought” and that the country would have to make savage spending cuts to bring its swelling deficit under control.....

...Mr. Cameron said that at more than 11 percent, Britain’s budget deficit was the largest ever faced by the country in peacetime. But he warned that the structural deficit was more worrisome. Britain owes more than $1.12 trillion, he said, and in five years will owe nearly double that if nothing is done now.

The country already spends more on interest payments on its debt than it does running its schools, he said, adding that determining how to reduce the deficit and cut down on borrowing is “the most urgent issue facing Britain today.”

http://www.nytimes.com/2010/06/08/world/europe/08britain.html?scp=4&sq=david%20cameron&st=cse

There doesn't seem to be any consensus among economists about which course is best, but it seems to me that the near-term effects simply can't be all that good for the European economic prospects. Cutting spending and raising taxes at a time when economic recovery is only beginning seems premature, yet there is also no doubt that debt levels are spiraling to untenable levels.

Then there is the social consideration. Imagine the reaction in the US if the President proposed cutting spending not only on social programs but military outlays as well (if the US military were cut in the same proportions as the German government is proposing our military would move from 1.4 million troops to 265,000).

Finally, there is the news from Japan, where 20 years of loose monetary policy and aggressive fiscal spending has been essentially unsuccessful. Here's a recent headline:

TOKYO (MNI) – Outstanding loans by Japanese banks fell 2.1% year-on-year to Y396.12 trillion in May, marking the sixth straight y/y
drop after a revised -1.9% (initially -1.8%) in April, Bank of Japan data released on Tuesday showed.

Lending continued to drop due to weak corporate fund demand, though the annual rate was held down by sharp gains in lending a year earlier.

http://www.forexlive.com/111468/all/japan-may-bank-lending-2-1-6th-yy-drop-in-row-apr-1-9

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