Budget cuts must go on, EU's Rehn says

Fri Jan 11, 2013 7:34am EST
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By Robin Emmott

BRUSSELS (Reuters) - Europe will need more spending cuts to emerge from its debt crisis despite an admission by the International Monetary Fund that cost cutting can choke economies, the EU's top economic official said on Friday.

The damage from aggressive austerity may be up to three times more than previously thought, the Washington-based lender said late last year, after earlier prescribing sharp deficit cuts to the euro zone. It has since shifted its advice, now arguing against forcing heavily indebted countries such as Greece to reduce their deficits too quickly.

The EU Economic and Monetary Affairs Commissioner Olli Rehn said the IMF's October study, which was updated this month, was not applicable to everyone and did not take into account that investors expect governments to act to control their debt.

"You have to take into account the confidence effect," Rehn told diplomats and executives during a speech in Brussels, adding that the impact of austerity differed across countries depending on whether they still had access to markets.

The difference in opinion appears to mark a split within the "troika" of international lenders - the Commission, the IMF and the European Central Bank - over how to deal with fragile European economies trying to pull out of recession in 2013.

Against a backdrop of record unemployment, many economists believe spending cuts in almost all euro zone countries drove the bloc into its second recession since 2009 last year.

But ECB chief Mario Draghi rejected any idea of easing up on efforts to reduce sovereign debt.

"So much progress accompanied by so big sacrifices have already taken place that to revert to a situation that has been found to be untenable would not be right," he told the ECB's monthly news conference on Thursday.   Continued...

European Economic and Monetary Affairs Commssioner Olli Rehn speaks to journalists during the EU Informal Economic and Financial Affairs Council (ECOFIN) Meeting in Nicosia, Cyprus September 15, 2012. REUTERS/Andreas Manolis