- - Wednesday, December 28, 2011

BERLIN Debt-weary European leaders faced voters this month and warned of more hard times ahead, a forecast that made some politicians cry as others tried to comfort their citizens.

“You are not responsible for the crisis,” Irish Prime Minister Enda Kenny told them.

In Italy, Welfare Minister Elsa Fornero broke down in tears at a news conference, leaving new Prime Minister Mario Monti to explain that retirees would see a drop in living standards.

These are dark days for Europe, and the watchword is “austerity.”

However, for European leaders who promised voters cradle-to-grave benefits, cutting welfare programs or raising the retirement age is like canceling Christmas.

“It’s necessary. There is no alternative,” said economist Carsten Brzeski of the ING financial group in Brussels. “But of course, politically it’s a very unattractive policy choice. It clearly means that you have to push it through, [but] you will not be liked by the public and probably eventually your government will fall.”

In brighter economic times - when even the onset of the 2008 global financial crisis looked like an ordinary boom-and-bust cycle - German Chancellor Angela Merkel invoked the cozy stereotype of the penny-pinching German housewife as a model for fiscal policy.

However, debt is spiraling out of control in one country after another. The euro - the common currency used by 17 of the 27 nations of the European Union - still faces a possible collapse that could ignite a global economic recession, and austerity measures were forced on a reluctant and, at times, riotous European public.

In Portugal, the ruling Socialist Party failed to win parliamentary support for austerity measures to avoid a bailout and had to seek a $104 billion loan from the EU and the International Monetary Fund. In October, a general strike was called to protest a 2012 budget that will bring tax hikes and fewer paid holidays.

Irish citizens have become increasingly angry about a series of cuts to welfare programs and repeated increases in income taxes to balance the government budget. In November 2010, Ireland was forced to accept a $114 billion bailout. The ruling Fianna Fail government crumbled the following January.

However, little has changed. On Dec. 4 Mr. Kenny, leader of the Fine Gael party, announced a new $5.1 billion austerity package that includes yet more increases in income taxes and more cuts in public spending.

“In my view, the budget is a continuation of the previous three years of failed policies,” said Constantin Gurdiev, economist at Trinity College Dublin. “The only remarkable thing is the swiftness with which the government has taken to the smash-and-grab policies of its predecessor.”

In Spain, the government cut public jobs and salaries, increased the retirement age and raised taxes on the wealthy. However the jobless rate remains at 21 percent, with youth unemployment at a staggering 46 percent. The increasingly desperate Spanish people voted last month to toss out a government blamed for the hardship but ushered in one that is adopting more of the same policies.

“We must be more German than the Germans in terms of austerity, discipline and correcting economic imbalances,” said Jose Manuel Garcia-Margallo, a member of the European Parliament for the newly elected People’s Party.

The call for stimulus spending

Some economists reject the austerity programs and claim that only more government stimulus spending will bring Europe out of its financial crisis.

“Austerity is now part of the problem, not the solution,” said Simon Tilford, chief economist at the Center for European Reform. “Investors are looking at eurozone economies and thinking, ‘How are they going to grow? How are they going to service their debt?’ Uncoordinated and excessive fiscal austerity is further weakening their growth prospects.”

Earlier this month, European leaders in Brussels agreed on measures that will mean national governments could have their budgets overruled by EU officials. The only country to reject the plans out of hand was Britain, where Prime Minister David Cameron has embarked on the biggest program of public spending cuts since the World War II.

Mr. Cameron was under huge pressure from euro-skeptics in his own Conservative Party, who fear a loss of budget control to EU bureaucrats in Brussels. Britain still retains the pound as it currency.

For some countries, however, the loss of control over their own budgets feels like nothing new.

In October, Greek Prime Minister George Papandreou faced the prospect of enacting a new set of austerity measures on a nation already taking to the streets to protest public spending cuts and tax hikes.

He shocked Europe by announcing plans for a public vote on the latest EU bailout package and the tough economic conditions attached to the loan. Mr. Papandreou was quickly summoned before a panel of fellow European leaders and the IMF. Within days, plans for the referendum were canceled, and Mr. Papandreou was forced to step down.

Italian Prime Minister Silvio Berlusconi was next to fall, after parliament passed austerity measures demanded by the EU.

Even among Italians - who had despaired of ever ridding themselves of a leader facing court actions on charges of corruption, fraud, mafia collusion and paying for sex with a minor - there was a sense of unease at their leader being toppled, not by a dissatisfied electorate, but by the European drive to stabilize markets.

Technocratic governments have been installed in Italy and Greece, and both passed austerity budgets for 2012 earlier this month.

“On one hand you need to do this to get the [loans], but on the other hand this intensifies the so-called death spiral we are experiencing,” said Theodore Pelagidis, an economics professor at the University of Piraeus in Greece, referring to the new round of cuts passed by an overwhelming majority on Dec. 6 even as protests turned violent outside parliament in Athens.

France and Germany react

Meanwhile, the big two economic powerhouses, Germany and France, have been enacting austerity measures of their own.

France increased the value-added tax and corporate income tax and raised the retirement age last year, despite major protests. Germany has committed itself to balancing the national budget by 2016, something many feel is unnecessary for a county that has weathered the economic storm well.

“Where you need some stimulus is Germany, and you don’t really want austerity in places like France,” said Simon Wren-Lewis, professor of economics at Oxford University in the United Kingdom. “But the problem at the moment is [that] we are getting austerity everywhere, so there is no stimulus anywhere in the eurozone.”

Others say Germany’s strength is the result of austerity measures introduced under Mrs. Merkel’s predecessor, Gerhard Schroeder, that the prove spending cuts work.

“You had structural reforms, austerity measures and labor markets reforms under Chancellor Schroeder, but he was already out of office when the economy started recovering and picking up,” said Mr. Brzeski of the ING financial group.

“That’s going to happen on a larger scale in many other European countries.”

Jason Walsh reported from Dublin.