Europe budget cutters outpace U.S.

U.S. political leaders like to talk about cutting budget deficits even while they are adding to them.

But European leaders from Britain to Greece, under the gun of a withering financial crisis, are actually proposing and carrying out drastic and unprecedented cuts in everything from hallowed state pension programs to green-energy projects, provoking the kind of public backlash that inspires fear in U.S. politicians.

The sharp contrast between talk and action on the two sides of the Atlantic has become a source of growing friction as world leaders meet in Canada to hash out plans for dealing with the economic problems left in the aftermath of the global financial crisis.

President Obama has clashed with even America’s closest allies in Germany and Britain, insisting that governments that are able to keep spending should do so to keep nurturing the world economy back to health. But few of Europe’s leaders think they have the luxury to do that anymore.

“I told him how important budget consolidation was,” German Chancellor Angela Merkel said after talking with Mr. Obama by phone on Monday. She said that the nearly $100 billion of budget cuts she has announced in Germany would not “slow down the global economy,” as Mr. Obama contends.

British leaders also are hearing a different drummer these days. Britain has joined the race in Europe to slash bloated budget deficits and avoid further destabilizing fallout from the simmering debt crisis.

Under pressure to avoid a downgrade of Britain’s cherished AAA credit rating, the nation’s new Conservative-led government proposed wrenching spending cuts, paring some agencies by nearly a third, as well as raising the state retirement age and levying a stiff increase in the nation’s value-added tax that will hit hard-pressed consumers.

Britain’s most austere budget in a generation even takes aim at the perks enjoyed by the royal family, proposing reforms in funding for the queen’s household.

“The truth is that this country was living beyond its means when the recession came, and if we don’t tackle pay and pensions, more jobs will be lost,” said British Chancellor George Osborne in urging British citizens to prepare for sacrifice.

Spain and Greece have imposed even steeper budget cuts in their race to avoid insolvency and further big downgrades in their credit ratings. Once hailed as a leader in promoting green energy, Spain’s government is now slashing renewable energy projects it lavished money on during the boom years, while pushing far-reaching labor reforms to improve economic efficiency.

In France, the conservative government has proposed a once-unthinkable increase in the retirement age from 60 to 62 - this in a nation that cherishes early retirement even more than Americans.

France’s powerful labor unions have vowed to fight the measure, but the government insisted it must maintain solidarity with other European countries in their movement toward reform.

France’s finance minister, Christine Lagarde, shrugged off Mr. Obama’s warning that such reforms could derail the global recovery.

“Balancing our public finances is a priority,” she told the Wall Street Journal. “The road is arduous, but our political determination is complete.”

The efforts of European leaders have been applauded in financial markets and won high praise from ratings agencies.

Meanwhile, ratings agencies and financial gurus continue to warn of a reckoning in the United States, whose debt crisis arguably has been only postponed by more immediate concerns about overspending in Europe.

U.S. deficit levels are comparable to those of some crisis-stricken European countries, but U.S. debt markets currently have the advantage of being considered safe havens among global bond investors.

Andrew B. Busch, global currency strategist with BMO Capital Markets, said investors have been pleased with European efforts to put their fiscal houses in order, and now are starting to focus on the unfavorable comparison with the United States.

“The U.S. continues to stick its head in the sand and ignore the animal mating calls of austerity measures” coming from Europe, he said. Like many other analysts, he thinks “a crisis may need to develop before [Washington] wakes up and takes action.”

Mr. Busch said the U.S. will also have to tackle its burgeoning retirement and health care programs to tame the deficit, possibly raising the retirement age like France and other European nations. Left unattended, the U.S. will find itself engulfed in a debt crisis as early as 2013, he said.

A debt commission established by Mr. Obama and charged with coming up with recommendations on taming the deficit is looking at options for returning Social Security, Medicare and other programs to solvency.

It will report its findings in the fall, but so far, the far-reaching changes needed in federal programs have not been part of the political debate leading up to the midterm elections.

To be sure, many economists and investors agree with Mr. Obama that for now, the focus should be on maintaining stimulus wherever possible and ensuring growth continues in the world economy.

Billionaire investor George Soros this week criticized Germany for slashing its budget and advocating monetary tightness at a time it could afford to spend more and help other more vulnerable European nations grow out of their debt problems.

“Germany’s policy is a danger for Europe; it could destroy the European project,” he told the German weekly Die Zeit. “Right now, the Germans are dragging their neighbors into deflation, which threatens a long phase of stagnation.”

Canada, which is hosting the Group of 20 summit in Toronto this weekend, is aiming to try to bridge the gulf in viewpoints by urging a “balance” on budget issues, said Bank of Canada Governor Mark J. Carney.

“Nobody should be looking to balance their budget next year,” as long as the global recovery remains “uneven and fragile,” he said in an interview with Reuters Insider.

“Nor should anybody be in a position where they think there’s no need to start laying out a plan to stabilize their debt position, the United States included.”