Euro shock
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Euro shock

When Angela Merkel talks about budget cuts these days, she likes to invoke the "Swabian housewife" - Germany's equivalent of the parsimonious Scot - and the German chancellor's embodiments of a good housekeeper.

world Updated: Jun 15, 2010 23:59 IST

When Angela Merkel talks about budget cuts these days, she likes to invoke the "Swabian housewife" - Germany's equivalent of the parsimonious Scot - and the German chancellor's embodiments of a good housekeeper.

"You can't keep living beyond your means," said Merkel.

"One should simply ask the Swabian housewife."

By extolling the virtues of old-fashioned thrift, Merkel hoped last week to go some way towards explaining to ordinary Germans why they must suddenly swallow the most painful austerity pill administered by their government in generations.

Even for a country painfully aware, because of its history, of the danger of debt, the extent of corrective action came as a shock.

"Germany has never agreed to an austerity package to this extent, but these cuts have to be made in order for the country to establish a stable economic future," Merkel said.

Soon, in Stuttgart and elsewhere, the inevitable protests began on the streets.

Across Europe, other governments, scared by the Greek debt crisis, the repercussions of which imperil the very existence of the euro, have been doing the same, raising the spectre of mass layoffs in public services in the name of European unity.

On Monday, British premier David Cameron said the state of UK's public finances was far worse than he had expected as he prepared his country for the worst.

"The decisions we make will affect every single person in our country. And the effects of those decisions will stay with us for years, perhaps decades, to come," he said.

Elsewhere, Italy has approved austerity measures that will freeze the salaries of ordinary public sector employees and cut those of the highest earners by 10 per cent.

Spain has ordered massive spending cuts this year and next to reduce its deficit by more than 4 per cent.

Crowds gathered outside Madrid's economics ministry calling for the prime minister's head.

"Zapatero resign!" they shouted.

Spain's biggest unions have threatened a general strike. The axe is falling, too, in Hungary, Portugal, Ireland and in Greece, where the government has been bailed out by Brussels and the IMF.

In total, EU governments have announced public spending cuts of around Euro 200 billion (Rs 11.4 lakh crore), as well as patching together a mammoth Euro 500-billion (Rs 28.5 lakh crore) safety blanket for the euro.

"We're entering a long period of economic stagnation," said Guy Verhofstadt, the former Belgian prime minister who leads the Liberal caucus in the European parliament.

"That will be the main problem for years. Europe is the new Japan."

But there is a very real fear that too much austerity, too fast, could damage the world's fragile economic recovery.

And across the world, there is dismay that EU governments are now taking action in direct contradiction to the approach that the G20 settled upon at the height of the global economic crisis.

US Treasury Secretary Timothy Geithner made it clear at last weekend's G20 meeting that the US did not want to see big European countries, such as Germany, slashing spending too much lest it damage domestic demand.

"The core nations of Europe, the strongest, richest countries in Europe, (should) keep active to help support recovery," Geithner said.

Economists echoed his concerns that Europe's sudden conversion to fiscal austerity would hurt the global recovery and strangle Europe's own faltering steps to better financial health by killing off global demand for products.

"The wrong message on deficits," thundered an editorial in the New York Times.

The piece went on to point out: "The sudden fierce enthusiasm for fiscal austerity, especially among stronger economies, is likely to backfire, condemning Europe to years of stagnation or worse."

Columnist and economics Nobel laureate Paul Krugman took the same line. He has been a trenchant critic of a rush to austerity, believing that only government stimulus to boost consumer demand will pull the American - and global - economies out of the mire.

But Cameron claimed on Monday, that "almost every country in the world" agrees with his view that austerity is the answer to current woes.

But across the world a growing number of experts would beg to differ.

First Published: Jun 15, 2010 23:55 IST