Europe and US clash over timing of austerity measures

The weekend's meeting of G20 finance ministers and central bankers saw heated exchanges between US and European representatives, with division centering on the speed at which government budget deficits should be reduced.

US treasury secretary Timothy Geithner argued the case for fiscal consolidation over the "medium term," while Europeans, rattled by the region's ongoing debt crisis, called for faster cutbacks.

"Stronger domestic demand in Japan and in the European surplus countries" is needed, Mr Geithner told reporters in Busan, South Korea, on Saturday (5 June).

European representatives said greater emphasis should be placed on restoring healthy public finances. "For the vast majority, addressing finances, budget consolidation, is priority No. 1," said French finance minister Christine Lagarde.

Translating words into action, German cabinet ministers appeared close on Sunday evening to agreeing on changes to welfare provision and a big reduction in the size of its armed forces.

The austerity drive in Europe's largest economy will not start in full until next year however, offering a crumb of comfort to the US.


European fears over the need to curtail budget deficits were not helped by the recent market jitters regarding the state of Hungarian public finances.

On Friday a press aide to newly elected Prime Minister Viktor Orbán said Hungary could miss its deficit-reduction targets and would need to work to avoid a default.

Ministers in the centre-right government back-tracked their rhetoric over the weekend after markets punished the country's currency and bonds, with observers saying the original statements had been intended for domestic political gains, possibly to justify spending cuts.

"The government has created an artificial crisis," said Tibor Szanyi, a long-serving member of parliament from the opposition Socialists. "They wanted to exaggerate the situation [for political ends]," he added.

The EU also dismissed the idea that Hungary was close to default. "Any talk of a fiscal or debt default in Hungary is widely exaggerated," said EU economy commissioner Olli Rehn on Saturday.

Hungary, a eurozone candidate country, was forced to turn to the IMF in late 2008 for financial support, but Mr Orban has indicated on several occasions that he wants the IMF to allow Hungary to run higher budget deficits than currently allowed under the country's borrowing programme.


Confusion caused by the Hungarian statements and fears that weaker eurozone states could follow in the footsteps of Greece caused the euro currency to fall to a fresh four-year low on Monday morning trading on Asian markets.

The drop will increase pressure on euro area finance ministers meeting in Luxembourg later in the day to finalise the terms of last month's eurozone rescue mechanism.

Ministers are expected to sign off on the final details of a 440 billion special purpose vehicle, intended to raise money on markets which can then be lent to struggling eurozone states.

The vehicle is the largest component of a 750 billion bail-out assembled by the EU and IMF in May.

[Source: By Andrew Willis, Euobserver, Brussels, 07Jun10]

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