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Europe-wide austerity will cause growth to slow down, warns Stiglitz

MANY European countries are pursuing "excessive austerity," thereby risking a marked slowdown in economic growth, according to the Nobel Prize-winning economist Joseph Stiglitz.

He said: "There's this disastrous policy even in the countries that don't need to have austerity."

Speaking at an investor conference in Moscow yesterday, Mr Stiglitz said: "We are already seeing around Europe the consequences of this austerity. The clear implication is that growth will be slower."

European governments are stepping up efforts to narrow budget deficits after the region's sovereign-debt crisis threatened to trigger defaults and undermine the euro.

Leaders are considering boosting the €750bn rescue fund and adopting more stringent deficit rules to avoid future turmoil after the bailouts of Greece and Ireland.

Mr Stiglitz said both countries had "no choice" other than to tighten fiscal policy, but that measures adopted by some other countries, such as the UK, were not justified.

Britain, where the economy contracted in the fourth quarter of 2010, is already seeing the fallout of the government's austerity programme, he said.

British Prime Minister David Cameron's government is implementing the largest fiscal squeeze since World War Two in an attempt to tackle the UK's record deficit.

Its economy unexpectedly shrank 0.5pc in the final three months of 2010 as the coldest December in a century hampered services and retailing.

Marked Slowdown

"Whether it (the economy) goes to double dip isn't clear, but that it will be slower is very clear," Mr Stiglitz said.

"We've gone through this experiment over and over again of what will be the consequences of austerity -- and it is a marked economic slowdown."

Global inflationary pressures from soaring food and commodity prices will also weigh on the economic recovery, he warned.

European economies will suffer as governments curb spending in order to narrow budget deficits and central banks rush to raise interest rates, he said.

"In Europe, it's going to play out worse because the budget-deficits problems are worse and the European Central Bank is much more committed to fighting inflation," Mr Stiglitz said, adding: "The US is a little bit more balanced in monetary policy, so it will be more willing to tolerate inflation." (Bloomberg)

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