Austerity measures to cut public debt and rein in speculation on the euro, while necessary in some countries, are threatening to kill Europe's fragile economic recovery, policymakers warned ahead of a summit today (17 June) aimed at strengthening budget discipline in the European Union.
European Union leaders are meeting in Brussels today (17 June) to agree new budget rules in the wake of the Greek debt crisis.
But policymakers and academics warned the austerity drive in countries like Germany risked frustrating a simultaneous attempt at re-launching economic growth, known as the ‘Europe 2020’ strategy.
European partners like France have openly chastised Berlin in recent months for adopting policies they say dampen consumption in Germany and aggravate imbalances within the 16-nation euro zone.
The 'Europe 2020' strategy is due to be formally endorsed by EU leaders today but critics say it risks losing credibility because of a lack of financial means and political commitment.
Maria João Rodrigues, a former special advisor to the European Commission turned university professor, said the shift towards austerity is "in contradiction with launching an ambitious strategy for a new growth model" based on green investment and information technologies.
"If you really want to move to a new growth model, you need to invest much more," Rodrigues told EURACTIV in an interview.
"It would be a mistake to have a summit just to reply to what is understood as the short-term pressure of financial markets."
"Some of the analyst and decision-makers want a shift towards austerity. I don't agree at all. It is much easier to achieve fiscal consolidation with a higher growth rate and with more investments and job creation. Without that, it will be extremely difficult to re-balance our budget."
"So we run the risk of making a big political mistake at the next European Council."
Rodrigues's criticisms were echoed by Simon Tilford, chief economist at the London-based Centre for European Reform. "The eurozone economy is not strong enough to cope with the contractionary effects of a generalised budgetary tightening. And if the euro zone falls back into recession, there will be no chance of putting public finances on a sustainable footing."
Some countries with high debt or budget deficits – such as Greece, Portugal and Spain, for example – have little option but to cut spending now, Tilford said. However, others such as Germany, which have a large current account surplus, should certainly not imitate them, he warned.
"The German government believes it is leading by example in embarking on a severe round of budget cuts. But this is the last thing the euro zone needs at this point and demonstrates an alarming parochialism."
"The fiscal crisis cannot be solved without economic growth. And the euro zone will only return to decent economic growth if the bloc's surplus economies, in particular Germany, start to consume more."
New sources of finance
For Rodrigues, Europe has to find new ways to fuel growth policies. First, she says member states which redirect their budgets towards key growth policies such as R&D and education "should be allowed more time to reduce their deficit and debt levels".
"There should be positive incentives," she stresses. "Second, governments need to find new revenue, for example via a financial transactions tax or a carbon tax."
Finally, she supports the issuance of Eurobonds in order to reduce the cost of public debt, although she admits the proposal might be controversial in Germany.
"Many governments are supporting the idea although some are against," she said, without citing countries. "That's why we need to fine-tune this instrument in order to make sure that there is no opportunistic behaviour and that these bonds are issued to finance the investments of the future, not to bail-out the debt of the past."
"At the end of the day, what is at stake today is whether the European Union can behave like a big global player."