EU nations push for deficit cuts to tame crisis

[May 18, 2010]  BRUSSELS (AP) -- EU nations are pushing for deep deficit cuts Tuesday to restore confidence in European governments' ability to tame the debt crisis and keep it from derailing the economic recovery.

Investors fear that European countries will not be able to reduce mounting debt and avoid years of slow economic growth despite a euro750 billion ($1 trillion) rescue package agreed last week to help eurozone nations avoid default.

EU Economy Commissioner Olli Rehn told reporters Tuesday that finance ministers would negotiate tougher budget rules because "it is now very important to reinforce confidence in the euro economy."

Market worries about Europe's economy have helped fuel the euro's fall to its lowest level against the dollar since April 2006 and lifted the price of gold, traditionally a safe haven when markets lose faith in other assets.

German Finance Minister Wolfgang Schaeuble -- whose country is paying the largest chunk of both the rescue package and a euro110 billion bailout for Greece -- said deficit reductions have to be a priority for the EU's 27 governments.

Closing the budget gap between what governments spend and earn each year would also reduce the risk of other countries requiring a bailout.

"We must now show that we are dealing with the crisis, defending the euro, but without letting matters rest -- that we erase the causes of the crisis permanently," he said. "That means reducing deficits, the real cause."

Anders Borg, Sweden's finance minister, called for new debt and deficit limits, saying a 2013 deadline for most countries to bring deficits to 3 percent of gross domestic product was "not very ambitious."

However, the 16 countries that use the euro are concerned that sharp spending cutbacks could damage economic growth -- and are asking the EU's executive commission to assess this summer which of them can afford to reduce debt quickly without their economies grinding to a halt.

Eurozone finance ministers defended the euro as a "credible" currency on Monday, saying price stability in the region will remain for years to come and "is a major feature of the euro and a major asset for investors."

Inflation -- or a rise in real prices that reduces the burden of existing debt -- may be stoked by government bond purchases that the European Central Bank is making as part of the EU rescue package. Until that plan was announced, the ECB had vowed it would not buy bonds out of a concern that it might cause inflation expectations to rise.

[Associated Press; By AOIFE WHITE]

Associated Press writers Carlo Piovano and Robert Wielaard contributed to this story.

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