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Austerity is failing say world leaders as we gear up for more

The Government is determined to press ahead with cuts and taxes of up to €4bn in the Budget at a time when policymakers throughout the world are seriously questioning the wisdom of austerity alone to deal with a debt crisis which is crippling global economies.

After the chaotic events in Europe on Friday, which have thrown the financial markets into fresh turmoil, it has become evident that the insistence of Germany on austerity alone is no longer supported by an influential majority in the eurozone and elsewhere.

The International Monetary Fund and the US have also urged alternative fiscal policies, to boost economic growth, as a way to help deal with the crisis which is now posing the most serious threat yet to the future of the eurozone.

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A Sunday Independent/ Quantum Research opinion poll has also found that a majority (51 per cent) wants the Government to ease back on austerity to protect existing jobs and to encourage growth.

But in the absence of a coherent policy change at the heart of Europe, Finance Minister Michael Noonan is set to continue to impose an austere Budget which many experts fear will have the effect of further damaging the domestic economy.

Almost a year on from the arrival of the IMF/EU/ECB troika, Mr Noonan remains constrained by the bailout deal negotiated last November, even though policymakers, including the troika, seem to be moving towards alternative policy positions.

Christine Lagarde, the head of the IMF, said on Friday that policymakers should use "all available tools" to boost growth as the world entered a "dangerous new phase".

The US treasury secretary, Timothy Geithner, has also questioned the focus on deficit reduction and monetary rather than fiscal policy. He has warned of "unwarranted disaffection with the efficacy of the traditional fiscal tools of tax cuts and investment to encourage growth".

The Government here, however, seems stuck on the path of austerity alone.

The Sunday Independent/Quantum Research poll found that 68 per cent did not agree that there was no "low lying fruit" to pick in the drive towards austerity.

Days after it emerged that the gap between public and private sector pay had widened to almost €300 a week, 66 per cent said the Government should revisit the Croke Park Agreement which protects public sector pay rates in return for certain reforms.

At the centre of the chaos on the financial markets on Friday is an evident lack of confidence that the global economy can contain the sovereign debt crisis.

As a result, the prospect of a sudden endgame, involving sovereign defaults, or even a fracturing of the common currency zone, has risen sharply.

The resignation of the German member of the European Central Bank Board on Friday has exposed a deepening division over the bank's handling of the debt crisis.

The decision of Juergen Stark to quit highlighted the board's disagreement over the ECB's purchases of government debt, including the debt of Ireland, and broadened last month to include Italian and Spanish bonds.

In the past four weeks the ECB has spent more than €55bn buying the bonds of Greece, Portugal and Ireland as well as Spain and Italy, a development which has heightened German alarm at the expansion of the ECB's responsibilities beyond its role of fighting inflation.

The ECB decision has also created an opportunity for Italy, in particular, to ease back on its stated intention to impose strict austerity measures.

But if the ECB were to stop buying Italian bonds as a result, interest rates would rise sharply and force Italy out of the bond market to join Greece, Ireland and Portugal in a bailout programme.

However, Italy is too big to accommodate within the lending resources available to the EU and IMF.

The watering down of the ECB's hawkish stance and the resignation of Mr Stark has intensified fears that the euro crisis is spinning out of control.

The unease has been further increased by rumours that a debt default is looming in Greece. Reports have also emerged that Germany is preparing contingency plans to defend its banks in the event of outright Greek default.

Sunday Independent