Austerity Debate Flares As Europe Recovery Fades

For more than five years since the eurozone hit turbulence over too much debt in 2009, governments' answer has been to raise taxes and restrain spending. The risk is that the eurozone remains stagnant for years — bad news not just for its people but also its three major trading partners: the U.S., Britain and China. Government spending can help boost growth by providing demand when the private sector is struggling. Francesco Giavazzi and Guido Tabellini at Bocconi University in Milan say the 18 eurozone governments should do a coordinated 5 percent tax cut, spread their budget balancing efforts over an extra 3-4 years, and issue long-term bonds that the ECB would buy. Draghi backed a proposal by Jean-Claude Juncker, the incoming head of the EU's executive commission, for a 300 billion-euro ($394 billion) fund to invest in infrastructure such as roads, bridges and ports, drawing on existing EU funds and private investment. There is a good argument that many are making that governments should make the most of that room and take out some more debt and invest more in infrastructure, education and other things. The Social Democratic Party, a partner in the coalition government with Merkel's conservatives, is pressing for more investment spending, and an expert commission is looking at the issue. A smaller scale but more likely approach would be for Germany and other EU leaders to look the other way if countries fall behind in reducing their deficits to meet European Union rules. Draghi urged countries to be smart in cutting their budgets — for instance, to spare spending on long-term investment that helps growth in future years, and not to just rely on growth-killing tax increases. France's President Francois Hollande is doing something along those lines, as his government is pushing 30 billion euros in business tax cuts through 2017, offset by 50 billion in spending cuts.