Europe mobilises against deficits, to reassure markets

25th May 2010, Comments 0 comments

A string of European governments drew up battle plans to attack budget deficits on Tuesday, with Britain, France, Italy and Denmark turning on public spending and pay, the pension age and taxes.

In a sharp switch under pressure from the eurozone debt crisis, and despite risks of triggering a new recession, these four countries joined a European offensive to shore up market confidence by taking harsh fiscal medicine.

Greece, Portugal and Ireland have already announced draconian action.

Governments across the political spectrum, from left to right, have been forced to slash spending to put the public finances in order now face the awkward task of explaining why and how to electors.

Stock markets plunged, meanwhile, as investors sought safety in the dollar and benchmark eurozone German and French bonds, rather than wait to see how the governments' measures would fare.

In London, the Queen's speech for a new parliament laid out the programme of the Conservative and Liberal Democrat coalition, with cuts of 6.25 billion pounds (7.2 billion euros, 8.9 billion dollars) just as a first step.

"The first priority is to reduce the deficit and restore economic growth," the Queen said in her speech prepared by the new ministers.

France, which last week switched tack to announce a three-year freeze on public spending, also seemed to be heading towards raising the minimum retirement age to 65.

This would be a major reversal of a central plank brought about by Socialist reforms in 1981 when the age was cut from 65 to 60. "This time, it's war," the financial newspaper Les Echos said in a headline.

Germany is raising its retirement age to 67 by 2019 and other countries are being forced to bite this hugely unpopular bullet in an effort to convince the financial markets they are serious about cutting their debt and deficits.

Reports in Italy said the government will unveil later Tuesday an austerity package worth 24 billion euros (29 billion dollars). The under secretary for the office of right-wing Prime Minister Silvio Berlusconi, Gianni Letta, warned on Monday that Italians now faced "very heavy sacrifices."

In Denmark, the minority Liberal-Conservative government also took tough action on its cherished welfare system on Tuesday.

Measures there cut unemployment benefit, the pay of ministers by five percent, capped overall family welfare benefits and ended some tax advantages.

They are intended to cut the public deficit to within the EU ceiling of 3.0 percent of output by 2013 from an estimated 5.5 percent this year.

The head of the main trade union LO, Harald Boersting said this added up to a "war declaration."

One of the factors continuing to weight on stocks globally was a rescue at the weekend of a Spanish provincial savings bank, CajaSur, which added to concerns about just how much more debt might be in doubt.

If there is more to come, the already weak Spanish economy could be badly hit again. The International Monetary Fund on Monday said that Spain must make urgent reforms of its labour market and banks.

The Socialist government has so far unveiled measures worth 65 billion euros in all to bolster the public purse and avoid having to be bailed out by its eurozone peers as was the case with Greece.

It also plans to restrict borrowing by regional adminstrations.

The public finances in many EU countries were burdened by large deficits even before the cost of supporting economies during the recent global downturn pushed spending up sharply, adding to the problem.

The debt crisis in Greece was a worst and special case, but it focused attention on structural problems in some other countries.

Muddled management by the EU authorities further undermined confidence, initially on bond markets where governments finance their deficits by selling debt to investment funds.

While the emphasis is on reducing spending, many analysts, economists and politicians have warned that cutting too much now could risk dampening demand so much that the European and even the global economy are pushed into a so-called double-dip recession.

They said the recovery so far is tentative and could easily be reversed if the deficit medicine is too harsh and kills instead of cures the patient.

© 2010 AFP

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