Europe's Decision to Dump Stimulus 'LikeTaking Up Smoking'

Economists say focusing on deficit could lead to double-dip recession.

June 27, 2010, 6:10 PM

TORONTO, June 27, 2010— -- President Obama lost the argument. His G-20 colleagues decided here in Toronto to turn their economic attention from spending on stimulus to cutting deficits.

That is exactly what Obama warned against, arguing that turning off the stimulus spigot could stop the fragile global economic recovery in its tracks.

Despite all the president's cajoling and arm-twisting, the host of summit of the world's industrialized and developing economies delivered the message that it is time to stop spending.

"Advanced countries must send a clear message, that as our stimulus plans expire we will focus on getting our fiscal houses in order," Canadian Prime Minister Stephen Harper said.

"Specifically we should agree that deficits will be halved by 2013," he said.

Harper suggested that trying to get the mix of stimulus and deficit cuts right is like walking a "tightrope."

Obama said that he was onboard with the decision by the world's leading economies to start cutting their deficits. The goal is to reduce those deficits by half by 2013.

But you could hear the warning he was making here this weekend during his post-summit news conference.

"We can't all rush to the exits at the same time," he said. "In each country, what we have to recognize is recovery is still fragile, that we still have more work to make recovery durable."

Some economists said they fear today's decision will reverberate around the world and could quite possibly lead to a double-dip recession.

"Europeans cutting their budgets now could thrust the global economy into a double-dip recession," University of Maryland professor Peter Morici said.

The prospects of a new recession look menacing, he said.

"It will be very difficult to recover from that," he said. "Then we start to get into depression-like conditions."

Double-Dip Recession Feared If Stimulus Spending Is Cut

The president signaled that he was going to give in, that he couldn't win the argument, when he met with the new British Prime Minister David Cameron.

"There are going to be differentiated responses between the two countries because of our different positions, but we are aiming at the same direction, which is long-term sustainable growth that puts people to work," Obama said after meeting with Cameron.

The European economies have been hit hard by the global recession. They have large deficits and their growth rates have lagged behind those of the United States and many Asian economies.

What does a double-dip recession mean? Morici suggested that unemployment will again rise above 10 percent, there will be no housing recovery, and credit will be even more difficult to obtain.

He said those conditions could last for another two to three years.

"What Europe did today would be like taking up smoking," Morici said. "You don't know when it's going to make you sick, but it will make you sick."

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