Britain, Germany pledge cuts in spending

"The decisions we make will affect every single person" in Britain, says Prime Minister David Cameron. (Alastair Grant/associated Press)
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By Howard Schneider
Washington Post Staff Writer
Tuesday, June 8, 2010

Two of Europe's largest countries on Monday pledged an assault on government spending as the euro remained weak and the International Monetary Fund issued a fresh call to restructure ailing European economies.

The move by officials in Britain and Germany was a reminder that the crisis over government debt in Europe is being felt not just in weak nations such as Greece, but in ones that have served as the continent's economic pillars.

It also illustrated the dilemma developing over how to deal simultaneously with Europe's weak levels of economic growth and high levels of government debt. Nations from Spain to Latvia are scrambling to show they are serious about controlling spending -- if only to avoid the type of pressure from bond investors that recently left Greece faced with rising interest rates and at risk of default before a joint European-IMF rescue plan was approved. At the same time, there is concern that aggressive budget cuts by too many countries at once could undercut European growth that is already trailing the United States and the rest of the world, and possibly trigger a new recession.

For the moment, however, the balance has swung in favor of fiscal austerity.

In London, Prime Minister David Cameron said that the country's finances were "worse than we thought" when the new conservative government took office, and would require changes in public spending and benefits that could "affect . . . our whole way of life."

In a stark speech, Cameron cast the scale of the problem in generational terms, attempting to lay the groundwork for spending cuts and policy changes to be detailed later this month.

"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," Cameron said.

In Germany, officials announced an $80 billion, multiyear package of cuts that would trim 15,000 workers from the public payroll, a step Chancellor Angela Merkel said was meant to "set an example" for other European countries, such as Greece and Spain, that are being asked to make even deeper adjustments.

Officials from the 16 countries that share the euro as a currency met in Luxembourg on Monday to agree to the final details of a trillion-dollar rescue fund they agreed to set up after Greece's troubles.

The IMF on Monday praised establishment of the fund as a "bold" step for the euro zone, but said that much more needs to be done to improve the operations of a monetary union that let problems in Greece and elsewhere "fester" into a crisis.

In a broad indictment of the structure of the union, the IMF noted that the euro zone still had no way to keep some countries from running massive deficits, as did Greece, or to coordinate policies so that rates of economic growth in the countries do not get too far out of sync. When it was introduced in 1999, the euro allowed less competitive countries such as Greece and Spain expand their economies with money borrowed at below-market rates -- a process that crashed after the countries' overall debt rose so high that bond investors began demanding unsustainably high interest rates.

The underlying economic problems of those countries -- the large public payrolls, the inefficient state-owned industries, the banks weakened by collapsing real estate markets -- were left unaddressed through those years and now need to be tackled, the IMF said.

"The current euro area crisis results from fiscally unsustainable policies in some countries, delayed repair of the financial system, insufficient progress in establishing the discipline and flexibility needed for a smooth functioning of the monetary union, and deficient governance of the euro area," the IMF said in a review of euro-area policies. "Consequently, divergences in economic performance have been allowed to fester, building up imbalances and leading to the recent dramatic wake-up call from markets. . . . Crisis management is not an alternative to the corrective policy actions and fundamental reforms needed."

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