March 20, 2012 / 2:07 AM / 8 years ago

Geithner warns EU against hasty budget measures

U.S. Treasury Secretary Timothy Geithner speaks at the Economic Club of New York March 15, 2012. REUTERS/Adam Hunger

WASHINGTON (Reuters) - U.S. Treasury Secretary Timothy Geithner said Europe was only at the initial stages of a long and difficult path toward fiscal sustainability and warned heavily indebted countries not to resort to draconian measures to fix their budgets, according to congressional testimony released on Monday.

“Economic growth is likely to be weak for some time. The path of fiscal consolidation should be gradual with a multiyear phase-in of reforms,” Geithner said in remarks prepared for delivery to the House Financial Services Committee on Tuesday.

“If every time economic growth disappoints, governments are forced to cut spending or raise taxes immediately to make up for the impact of weaker growth on deficits, this would risk a self-reinforcing negative spiral of growth-killing austerity,” he said.

The countries at the heart of Europe’s debt crisis — Greece, Ireland, Spain, Italy and Portugal — have each taken steps to reduce their budget deficits and impose reforms to make their countries more competitive. Spain, for example, is overhauling its financial sector and Ireland is recapitalizing its banks.

But Geithner said fiscal reforms were only part of the solution. “For these economic reforms to work, policymakers in the Euro area will have to be careful to calibrate the mix of financial support and the pace of fiscal consolidation,” the Treasury Secretary said.

“The reforms will take time and they will not work without financial support that enables governments to borrow at affordable rates and keeps the overall rates of interest across the economy at levels that won’t kill growth,” said Geithner, who has made similar remarks to Republican lawmakers about not slashing the U.S. fiscal deficit at the expense of economic stability and growth.

Reporting By Rachelle Younglai; Editing by Leslie Adler and Diane Craft and Paul Tait

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