U.S. welcomes growth debate in Europe

Reuters News
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Posted: May 15, 2012 12:18 PM
U.S. welcomes growth debate in Europe

WASHINGTON (Reuters) - The Obama administration on Tuesday welcomed Europe's shift in its focus to economic growth from the tough budget measures that heavily indebted euro zone nations have put in place to put themselves on a sounder fiscal path.

"They have a stronger set of tools to manage the crisis now in place," Geithner told an event sponsored by the Peterson Foundation. "That allows them to shift the focus where they should to how they create the conditions for more growth."

Greece, Ireland, Spain, Italy and Portugal - countries at the heart of the European debt crisis - have taken tough austerity measures to slash budget deficits in the hope of regaining market confidence and lowering borrowing costs.

However, in doing so, they have undercut growth in the region and roiled the political waters.

French President Francois Hollande, who was sworn in on Tuesday, was swept into office on calls for a fresh focus on growth. Elections in Greece left its parliament deadlocked between supporters and opponents of the nation's 130 billion euro bailout, forcing it to call new elections on Tuesday.

In his remarks, Geithner threw the Obama administration's support behind Europe's efforts to strike a balance between growth and austerity.

"We should welcome this new debate about growth in Europe," Geithner said, just days before leaders from the Group of Eight powers meet at the U.S. presidential Camp David retreat in the Maryland countryside.

Geithner warned of the risk of "a negative spiral of growth-killing austerity" if governments were to continually seek further measures to tighten their budgets when a shortfall in growth pushed up their deficits.

He also welcomed calls for public infrastructure investment in Europe and said wages in European powerhouse Germany needed to rise more rapidly than elsewhere in the region for "a sustained period" to help other nations regain competitiveness.

Economic output was flat in the euro zone during the first quarter with growth in Germany offsetting stagnation in France and contraction in southern Europe.

WORLD WON'T ALWAYS HAVE CONFIDENCE IN U.S.

Domestically, the Obama administration is facing its own set of fiscal and political problems. After the November presidential election, the White House and Congress will have two months to address automatic tax increases and spending cuts that could push the country back into recession.

Geithner warned U.S. lawmakers that the world will not always have confidence in the U.S. political system if Washington does not address America's fiscal issues. The United States is expected to run a deficit of more than $1 trillion for the fourth year in a row in the current fiscal year.

"We can't run the country on the assumption that the world is always going to have confidence in the ability of the American political system to act," he said.

"We have to earn that confidence over time. We have to justify that confidence. That is going to require us to do more in the near term," he said.

Tax breaks enacted under former President George W. Bush, which affect nearly all U.S. taxpayers, will expire December 31. At the same time, $1.2 trillion in automatic budget cuts are set to kick in in early January if Congress does not find another way to reduce the budget deficit by the same amount over 10 years.

(Reporting by Glenn Somerville, Jason Lange, Rachelle Younglai; Editing by Chizu Nomiyama)