HELSINKI (Reuters) - Europe’s top economic official hit back on Tuesday at economists who argue that EU-prescribed deficit-cutting policies are driving southern European countries into a downward spiral of recession and debt.
Olli Rehn responded in an interview in a Finnish newspaper to U.S. economist Paul Krugman and others who argue that Brussels should encourage debt-burdened countries to stimulate economic growth rather than cut spending further.
The controversy turned personal last month when the European Commission published forecasts showing the recession in southern European countries applying tough austerity policies would be deeper and last longer than previously projected.
Krugman accused the Commissioner for Economic and Monetary Affairs of a “Rehn of Terror” for arguing that EU countries’ budget consolidation policies had restored market confidence.
“Krugman put words in my mouth that would be termed in the Finnish Parliament a modified truth,” Rehn told Helsingin Sanomat daily, using a parliamentary euphemism for a lie.
Krugman said only the European Central Bank’s pledge to buy government bonds to preserve the euro had calmed markets and called Rehn “the face of denialism when it comes to the effects of austerity”.
In a subsequent blog post in the New York Times, he accused the Finnish EU official of propagating “cockroach ideas” which kept coming back however hard people tried to flush them away.
Rehn said Krugman and other critics had distorted the findings of an International Monetary Fund study published last year on so-called “fiscal multipliers” and the consequences of austerity policies to attack European policies.
In the paper, IMF economists acknowledged they may have underestimated the impact of government spending cuts in dampening growth.
“It is essential that the IMF paper does not give rise to the conclusion that economic adjustment would not be desirable,” the commissioner said, adding that Brussels and the IMF agree on the importance of structural economic reforms to boost growth.
Responding to those who argued for a slower pace of fiscal consolidation to ease the pain on citizens, Rehn said that might have been possible if unlimited cheap funding had been available from either the private sector or other euro zone countries.
“What I don’t understand is where on earth the stimulus money could have come from,” he said, adding: “I sincerely hope that people who are cleverer than me will suggest alternative ways of getting credit flowing into Europe.”
So far, distinguished economic experts had not suggested any financially or politically realistic alternatives, Rehn was quoted as saying.
Writing by Paul Taylor; Editing by Catherine Evans