US Treasury chief warns Europe against too much austerity

US 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 boost their economies, 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 he 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 US fiscal deficit at the expense of economic stability and growth. [Reuters]

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