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Europe faces 'long, hard road' to recovery, US treasury secretary says Europe faces 'long, hard road' to recovery, US treasury secretary says
(40 minutes later)
Europe is only at the beginning of a "very tough, very long, hard road" to recovery and its future is still a threat to the US economy, treasury secretary Timothy Geithner warned on Tuesday. Europe is only at the beginning of a "very tough, very long, hard road" to recovery and its future is still a threat to the US economy, Timothy Geithner, the treasury secretary, warned on Tuesday.
In testimony to the House Financial Services Committee on the state of the international financial system Geithner warned against draconian spending cuts by heavily indebted countries and called on better-off European countries to help their neighbours. In testimony to the House financial services committee on the state of the international financial system, Geithner warned against draconian spending cuts by heavily indebted countries and called on better-off European countries to help their neighbours.
"Economic growth is likely to be weak for some time. The path of fiscal consolidation should be gradual with a multiyear phase-in of reforms," Geithner said."Economic growth is likely to be weak for some time. The path of fiscal consolidation should be gradual with a multiyear phase-in of reforms," Geithner said.
"If every time economic growth disappoints, governments are forced to cut spending or raise taxes immediately to make up for the impact of weaker growth on deficits, this would risk a self-reinforcing negative spiral of growth-killing austerity," he said."If every time economic growth disappoints, governments are forced to cut spending or raise taxes immediately to make up for the impact of weaker growth on deficits, this would risk a self-reinforcing negative spiral of growth-killing austerity," he said.
The worst hit eurozone countries, Greece, Ireland, Italy, Portugal and Spain, have taken steps to reduce their budget deficits and impose reforms to make their economies more competitive. The UK has also announced huge budget cuts. The worst-hit eurozone countries – Greece, Ireland, Italy, Portugal and Spain – have taken steps to reduce their budget deficits and impose reforms to make their economies more competitive. The UK has also announced huge budget cuts.
"Fiscal reforms are only part of the solution," said Geithner. "The harder challenge is to address the erosion in competitiveness and restore reasonable rates of economic growth." "Fiscal reforms are only part of the solution. The harder challenge is to address the erosion in competitiveness and restore reasonable rates of economic growth."
Geithner was speaking as Italy's prime minister Mario Monti held potentially make-or-break talks with trade unions aimed at cutting legal protection for workers. Geithner was speaking as Italy's prime minister, Mario Monti, held make-or-break talks with trade unions aimed at cutting legal protection for workers.
Labour leaders have fiercely defended the rules, which are blamed by some for Italy's sluggish growth rate. Earlier this year ratings agency Standard & Poor's cited opposition to the reforms as one of its reasons for cutting the country's credit rating. Labour leaders have fiercely defended the rules, which are blamed by some for Italy's sluggish growth rate. Earlier this year the ratings agency Standard & Poor's cited opposition to the reforms as one of its reasons for cutting Italy's credit rating.
Failure to persuade union leaders, who fear they may have already given too much away in an atmosphere of national emergency, could unleash strikes and dissent within the grand coalition of parties supporting Monti in parliament. Failure to persuade union leaders, who fear they may have already given too much away in an atmosphere of national crisis, could unleash strikes and dissent within the grand coalition of parties supporting Monti in parliament. The labour rules have been blamed for creating southern Europe's two-tier system, where older staff monopolise protected roles and the young are either left unemployed or stranded in precarious short-term jobs.
The labour rules have been blamed for creating a two-tier system familiar across southern Europe, where older staff monopolise protected positions and the young are either left unemployed or stranded in precarious short-term contracts. More than 30% of 18 to 24-year-olds in Italy are unemployed, and only about 57% of Italians have a job, giving the country one of the lowest employment rates and slowest growth in the eurozone.
More than 30% of 18 to 24-year-olds in Italy are unemployed, and only about 57% of Italians have a job, giving the country one of the lowest employment rates in the eurozone. It also has some of the slowest growth on the continent. Geithner warned that eurozone policymakers would have to be "careful to calibrate the mix of financial support and the pace of fiscal consolidation.
Geithner warned that eurozone policymakers will have to be "careful to calibrate the mix of financial support and the pace of fiscal consolidation."
"The reforms will take time and they will not work without financial support that enables governments to borrow at affordable rates and keeps the overall rates of interest across the economy at levels that won't kill growth.""The reforms will take time and they will not work without financial support that enables governments to borrow at affordable rates and keeps the overall rates of interest across the economy at levels that won't kill growth."
The US recovery has been significantly stronger than recovery in Europe, Geithner said, and the US was far ahead of Europe on "nearly every measure". In part this was because "Europe's financial system became much larger, much more leveraged and much riskier, even than the US financial sector," he said. The US recovery had been far stronger than Europe's, Geithner said, and the US was ahead of Europe on "nearly every measure". In part this was because "Europe's financial system became much larger, much more leveraged and much riskier, even than the US financial sector," he said.
But while the US has begun to recover, Europe's malaise is "one of the most important factors that has kept growth in the US down". Geithner said the situation was far less worrying than it had been six months ago but added: "One should be very realistic about the challenges Europe still faces. A lot of challenges are still ahead for us and for them." But while the US had begun to recover, Europe's malaise was "one of the most important factors that has kept growth in the US down". Geithner said the situation was far less worrying than it had been six months ago but added: "One should be very realistic about the challenges Europe still faces. A lot of challenges are still ahead for us and for them."
Geithner and Federal Reserve chairman Ben Bernanke will address Europe's financial woes and their likely impact in the US again this week at a hearing of the House Committee on Oversight and Government Reform. Geithner was speaking as Italy's prime minister Mario Monti held talks with trade unions aimed at cutting legal protection for workers.
Last month Bernanke told Congress that Europe's financial crisis had slowed the US recovery. Reforms were under way, Bernanke said: "However, critical fiscal and financial challenges remain for the eurozone, the resolution of which will require concerted action on the part of European authorities. Further steps will also be required to boost growth and competitiveness in a number of countries." Labour leaders have fiercely defended the rules, which are blamed by some for Italy's sluggish growth rate. Earlier this year ratings agency Standard & Poor's cited opposition to the reforms as one of its reasons for cutting the country's credit rating.
Geithner and the Federal Reserve chairman, Ben Bernanke, will address Europe's financial woes and their likely impact in the US again this week at a hearing of the House committee on oversight and government reform.
Last month Bernanke told Congress that Europe's financial crisis had slowed the US recovery. Reforms were under way, he said: "However, critical fiscal and financial challenges remain for the eurozone, the resolution of which will require concerted action on the part of European authorities. Further steps will also be required to boost growth and competitiveness in a number of countries."