Austerity cuts seems to be the theme of my blog posts today. Heavily indebted European governments need to "deleverage," as the current buzz word has it, but how far and, crucially, how fast?
In Britain, despite warnings from the opposition Labour Party about the pace and size of cuts doing more harm than good, Britain's Conservative-led coalition government has reduced the size of government spending with abandon. Predictably Prime Minister David Cameron's austerity program has landed the country on the door-step of a double-dip recession. The economy contracted in the last quarter of 2011 by 0.2 percent.
At Prime Minister's Question Time today, Cameron contemptuously swatted away criticism from Labour leader Ed Miliband. But that is party politics. The IMF's chief economist Olivier Blanchard is no left-wing politician and he told the BBC today it would be wise for Cameron and his Chancellor of the Exchequer George Osborne to slow down the pace of the cuts.
" ... if growth is really dismal then you may decide that you're going to go a bit more slowly ..."
The BBC interviewer, Nick Robinson, asks Blanchard directly, So we don't need to cut as deep as we are? The answer, "You have some room to do something if needed, yes if growth were to be even worse than we have forecast." Based on today's figures it will be even worse than the IMF predicted (see the blog from yesterday).
But the whole notion of austerity cuts in Europe is coming under fire. This is NYU professor Nouriel Roubini speaking at Davos today, "The policy response is making the recession worse. What Europe needs is less austerity and more growth."
Roubini is concerned about the deep recession in the euro zone's peripheral countries: Spain, Portugal, Ireland, Italy Greece. All are on a strict regime of austerity and Roubini is making the point that austerity won't let them grow their way out of their predicament. He won't get a Nobel prize for stating something so blindingly obvious.
Roubini is calling for a devaluation of the euro by 20 to 30 percent. The problem is how to make that happen.
Adding to the chorus of austerity critics is George Soros, but his criticisms are aimed at the social effect of the German led euro zone austerity drive. The Wall Street Journal, quotes Soros saying, “Germany is acting as the taskmaster imposing tough fiscal discipline This will generate both economic and political tensions that could destroy the European Union.”
Soros added, however, that the German leadership was shifting its thinking and trying to find its way to a different solution to the crisis, one that was less monomaniacal about reducing debt now, now, now and keeping a tight rein on the European Central Bank.