By Nick Mann | 25 April 2013
European Union countries should not slow down economic reforms or they will damage growth and shift the problem to the next generation, a European Central Bank board member warned today.
Speaking at the Bellwether Europe conference in London, Jörg Asmussen said that delaying austerity measures was ‘not an easy way out’ from the hardship associated with cutting public spending and rebalancing economies. ‘If it were, we would have taken it,’ he said. ‘Countries are consolidating because, given their already high debt levels, it is the best way to secure long-term stability and inter-generational fairness.’
He added: ‘It would help the politics of adjustment if this message got more attention.’
Earlier this week, European Commission president José Manuel Barroso warned that citizens in the countries most affected by austerity measures could be running out of patience with the approach.
Delaying consolidation would mean higher debt levels. These, in turn, would put countries at the mercy of financial markets, which might choose to finance the new debt at high rates, Asmussen said.
It would also lead to an ever-increasing proportion of revenue going on servicing debt rather than investing in future growth.
‘Third, it simply passes the burden of consolidation to the next generation,’ he added. ‘Under the new EU debt rule, all euro area countries are legally bound to start reducing their public debts below 60% of gross domestic product. So the more debt rises today, the more it has to be brought down in the future. And six euro area countries already have debt levels in excess of 90% of GDP.’
Asmussen also warned against putting off structural adjustment, which he said was needed to create a more competitive, export-led economic model.
Structural reforms were also ‘essential’ to make fiscal consolidation work. ‘If people see only budget cuts and tax rises, with no measures to produce higher growth, it is no wonder they reject adjustment,’ he said.
‘Overcoming the political challenges to adjustment is fundamentally about communication,’ he added. ‘It is about pointing out the real costs of alleged alternatives; about resisting the temptation to blame others for problems that begin at home; and about explaining the long-term benefits of the path being taken.’
At the same event, David Lipton, the first deputy managing director of the International Monetary Fund, warned that Europe still faced ‘severe vulnerabilities’, which could lead to it slipping into stagnation.
‘If recovery does not materialise, the euro area could find itself facing the spectre of policy quicksand – in which relentless balance sheet deterioration drags the economy in deeper and blunts the impact of even bold policy adjustment,’ he said.
To avoid this, fiscal policy should be made more ‘growth-friendly’, while countries must also carry out the structural reforms needed to make their economies more competitive, Lipton explained. Steps should also be taken towards a full banking union, he added.
The comments came as figures revealed that the number of people out of work in Spain, one of the country’s worst hit by the eurozone crisis, topped 6 million in the first three months of this year. Data from Spain’s National Statistics Institute shows that 27.16% of the Spanish population is now out of work, with over 500,000 more people unemployed than was the case a year earlier.
