Could Europe be heading for a permanent recession?

European leaders last week decided on a plan for greater austerity. But that plan could backfire and stunt growth in the future.

Steve Chiotakis: Borrowing costs in Europe are back on the rise. Spain and Italy had been able borrow at cheaper rates for a few days after European countries announced plans to be more watchful of budgets. But some economists say new, stringent measures to reign in spending could actually make matters worse.

From London, Marketplace's Stephen Beard reports.


Stephen Beard: Europe calls it a "fiscal union." It will compel governments to balance their books, largely by cutting their spending.

But Paul Macnamara of the GAM fund management firm says the axe will fall at the worst possible time for Europe.

Paul Macnamara: This reduced government spending looks set to come at the same time as banks tighten up and they reduce private sector spending. And that kind of constitutes a double whammy to growth.

And this could be a disaster for the debt-laden countries of Europe.

Sony Kapoor: The worst thing you can do when you're excessively indebted is to not grow.

Sony Kapoor, of a think-tank called Re-Define, says if an economy fails to grow, tax revenues fall, while governments have to spend more on welfare.

Kapoor: If you don't grow, your debt will keep on becoming worse. And you have to run faster and faster to stand still.

But the Germans -- who are the driving force behind the fiscal union -- say Europe has got to deal with its debt. And not just Europe.

Alexander Graf Lambsdorff, a German lawmaker, says a new age is dawning, and Europe is leading the way.

Alexander Graf Lambsdorff: I believe that in Europe we are a little bit ahead of the United States in having realized that the age of eternal debt and over-indebtedness has come to an end.

Lambsdorff sayss that big democratic governments, in the U.S., Japan and Europe have been gorging on debt for too long. They've been bribing their voters with goodies which they can no longer afford.

Lambsdorff: Our entitlement programs will have to be cut; pensions systems are under strain; our health care is going to deteriorate -- if we do not turn this around and return to a system in which the money you spend is money you've earned before.

But critics of the Europe's planned fiscal union say if the continent relies only on austerity, there will be a new age -- one of permamanent recession.

In London, I'm Stephen Beard for Marketplace.

About the author

Stephen Beard is the European bureau chief and provides daily coverage of Europe’s business and economic developments for the entire Marketplace portfolio.

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