Brussels, 10/10/2012 (Agence Europe) - The European Commission is sticking to its guns - the national budget belt-tightening strategy has of course had a negative impact on economic performance, but is crucial in order for the member states to achieve room for manœuvre in the medium-term for investment and a return to economic growth. “Fiscal consolidation strategy is one that favours growth,” said a Commission spokesperson on Wednesday 10 October. The strategy has to be “smart” and protect areas where investment is crucial for future growth, added the spokesperson for Euro Commissioner Olli Rehn.
In a report published ahead of the autumn meetings of the IMF and the World Bank in Tokyo this week, the IMF says that it has underestimated the negative impact of budget austerity on growth. It used to believe that for every euro in public spending cuts, there would be a 50 eurocents decrease in the country's GDP, but now believes that each euro of spending cuts will lead to a reduction of between 90 eurocents and €1.70 in GDP as a direct result of the spending cuts. It has also reduced its growth forecasts for the world and the eurozone.
In Luxembourg on Tuesday, Rehn did not deny the immediate contraction of the economy caused by the public spending cuts, but said the cuts were having a positive impact on investor confidence. He quoted research by economists showing that any public debt of above 90% of GDP wiped out a country's growth potential. The Commission is examining the new forecasts with a fine-tooth comb, but is not planning any immediate change in strategy. (MB/transl.fl)