Aug. 24 (Bloomberg) -- Nobel Prize-winning economist Joseph Stiglitz said the European economy is at risk of sliding back into a recession as governments cut spending to reduce their budget deficits.
“Cutting back willy-nilly on high-return investments just to make the picture of the deficit look better is really foolish,” Stiglitz, a Columbia University professor, told Dublin-based RTE Radio in an interview broadcast today.
Euro-area governments stepped up efforts to cut their deficits to below the European Union limit of 3 percent of gross domestic product after the Greek crisis earlier this year eroded investor confidence in the 16-member currency union. While the economy expanded at the fastest pace in four years in the second quarter, the recovery is showing signs of weakening.
“Because so many in Europe are focusing on the 3 percent artificial number, which has no reality and is just looking at one side of a balance sheet, Europe is at risk of going into a double-dip,” Stiglitz said.
Growth in Europe’s services and manufacturing industries slowed more than economists forecast in August and German investor confidence slumped to the lowest in 16 months. Moody’s Investors Service said yesterday that “risks to economic growth are clearly to the downside” in the euro-region economy.
The average budget deficit in the euro area will probably widen to 6.6 percent of GDP this year from 6.3 percent in 2009, the European Commission forecast in May. The Greek government aims to pare its shortfall, the region’s second largest, from 13.6 percent of GDP last year to 8.1 percent this year and to within the EU limit in 2014, it has said. The country has cut wages and pensions and increased taxes to stave off a default.
At 14.3 percent of GDP, Ireland had the highest deficit in the euro region last year. The shortfall will narrow to 11.7 percent this year, excluding the cost of bank bailouts, the commission forecast.
“Obviously, Ireland by itself is too small to determine what happens to Europe as a whole,” Stiglitz said. “But if Germany, the U.K. and other major countries follow this excessive austerity approach, Ireland will suffer.”
Stiglitz said that with companies still cutting jobs, he doesn’t expect economic growth to strengthen anytime soon.
“The problem is that we aren’t getting out of this current crisis very quickly,” he said. “What we’re doing is setting ourselves for a longer-term Japanese-style malaise of weak growth for an extended period of time. It’s very disturbing that people are talking about a new normal” with unemployment as high as 10 percent “which would be devastating.”
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