Nobel Prize-winning economist Joseph Stiglitz said the European economy is at risk of sliding back into a recession as governments cut spending to reduce their budget deficits.
"Cutting back willy-nilly on high-return investments just to make the picture of the deficit look better is really foolish," Stiglitz, a Columbia University professor, told Dublin-based RTE Radio in an interview broadcast on Tuesday.
Euro-area governments stepped up efforts to cut their deficits to below the European Union limit of 3% of gross domestic product after the Greek crisis earlier this year eroded investor confidence in the 16-member currency union. While the economy expanded at the fastest pace in four years in the second quarter, the recovery is showing signs of weakening.
"Because so many in are focusing on the 3% artificial number, which has no reality and is just looking at one side of a balance sheet, Europe is at risk of going into a double-dip," Stiglitz said.
"Obviously, Ireland by itself is too small to determine what happens to Europe as a whole," Stiglitz said. "But if Germany, the UK and other major countries follow this excessive austerity approach, Ireland will suffer."
Stiglitz said that with companies still cutting jobs, he doesn't expect economic growth to strengthen anytime soon. "The problem is that we aren't getting out of this current crisis very quickly," he said.
"What we're doing is setting ourselves for a longer-term Japanese-style malaise of weak growth for an extended period of time. It's very disturbing that people are talking about a new normal" with unemployment as high as 10% "which would be devastating."
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