Davos sees US and Europe split on cuts

28th January 2011, Comments 0 comments

European and US leaders laid out starkly different recovery strategies at Davos on Friday, with one side calling for deep spending cuts and the other warning against drastic action.

Members of the business and political elite gathered at the World Economic Forum were treated to appearances by Britain's Prime Minister David Cameron, US Treasury Secretary Timothy Geithner and Germany's Chancellor Angela Merkel.

But, as delegates debated how best to protect and nurture the world's tentative economic recovery, these top figures from three of most prosperous Western economies brought very different messages.

Cameron vowed that under his leadership Britain would pursue huge spending cuts to slash its yawning deficit, despite the week's alarming British growth figures, which have triggered fears of renewed recession.

"Our first priority is to kill off the spectre of massive sovereign debts," he declared. "Those who argue that dealing with our deficit and promoting growth are somehow alternatives are wrong."

Cameron urged Europe to kickstart growth by slashing regulation and boosting enterprise, rather than through stimulus spending, and said he would reduce the deficit through cutting public spending and raising retail sales tax.

"It's going to be tough, but we must see it through. The scale of the task is immense, so we need to be bold in order to build this economy of the future," he argued, stressing that many European leaders agree with him.

Merkel also banged the drum for deficit reduction, warning delegates that: "Indebtedness is the biggest danger for prosperity on this continent. This is why we have to resolutely work against it.

"Budget consolidation remains of prime importance to us and has not caused us any problems, quite the opposite," she said, arguing that Germany's spending cuts have strengthened its return to growth.

But Geithner came with a quite different message, stressing that the United States was not for its part ready to contemplate drastic spending cuts until the health of the recovery was assured.

"You've got to make sure that you don't hurt the recovery and take too much risk that you damage the early expansion by shifting too prematurely to substantial restraints," he told the same Davos audience.

"We're not going to let that happen. There are some people who like to move... very quickly to do very deep cuts in spending but it is not the responsible way to do it," he said, in a question and answer session.

"It would undermine the long-term objective of making sure that we achieve a sustainable fiscal position," Geithner argued.

On Tuesday, Britain revealed that its economy slumped unexpectedly in the fourth quarter of 2010, shrinking 0.5 percent in the three months to December, after expansion of 0.7 percent in the third quarter.

Experts put some of the blame on unexpectedly extreme winter weather, which disrupted Christmas shopping and air travel, but the dip has given ammunition to critics who argue that Cameron is cutting too much, too fast.

In Washington, the US Commerce Department said Friday that the US economy grew at its fastest clip in five years in 2010, with growth reaching 2.9 percent for the year, reversing the 2.6 percent contraction in 2009.

Consumer spending grew 4.4 percent in the last quarter, while growing exports and declining imports also served to boost growth.

"There is much more confidence now that we've got a sustainable expansion," Geithner said ahead of the data release, while admitting: "It's not a boom, it's not an expansion that's going to offer the possibility of a rapid employment rate."

Obama's Republican critics -- who have just formed a majority in the House of Representatives -- are demanding deep spending cuts to rein in a budget deficit expected to hit a record 1.5 trillion dollars this year.

The annual Davos conference has attracted 2,500 key decision makers from business and politics to this snow-bound high altitude resort for four days of the world's most influential elite networking event.

© 2011 AFP

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