What Should The U.S. Learn From Europe's Woes?
As President Obama and Capitol Hill lawmakers assess the need for spending cuts and tax increases against the risk of triggering a new recession, they might look across the Atlantic for insights from those who have already grappled with those budgetary questions.
The problem of excessive government debt has swamped economies across Europe and forced countries to take severe measures to cut their deficits. The first lesson from their "fiscal consolidation" experiences: It will hurt.
"Fiscal consolidation, which has happened in Europe much more actually than in the U.S. so far, has had a major impact on growth," says Olivier Blanchard, director of research at the International Monetary Fund. "If you look country by country, you'll find that the countries which have strongest fiscal consolidation actually have less growth."
IMF economists now foresee economic activity in the eurozone area as a whole shrinking by 0.4 percent in 2012, with Greece, Spain, Italy and Portugal suffering especially sharp declines in output. Those are also the countries that have pursued the most aggressive deficit reduction programs.
Different Kinds Of Deficit Reductions