Austerity measures are too early says leading economist

Nobel prize-winning economist Paul Krugman says Germany has begun imposing austerity measures far too soon and that it could endanger fragile economic growth. Bank levies and a global transaction tax: those two items will be on the agenda in  Toronto this weekend for the G-20 summit.  With just days to go before the summit starts, however, it is becoming increasingly clear that German Chancellor  Merkel may not have much fun during her weekend excursion. Opposition to her reform proposals is widespread and, more ominously, frustration is building with Germany's new focus on budget consolidation and debt reduction, In an interview with the German business daily Handelsblatt on Monday, Nobel prize-winning economist Paul Krugman joined Berlin's legions of detractors, and took aim at the government's recently agreed to €80 billion austerity package."I don't have a problem with trying to balance the budget in five or 10 years," Krugman told the paper. "The question is whether one should start when the economy is at 7 or 8 percent below its normal capacity and interest rates are at zero.... Now is not the time to be worried about deficits." Later in the interview, Krugman said, "the German austerity package is really a bad idea."

Krugman is far from alone with his concerns about German and European austerity packages. Last week, US President Barack Obama sent a letter to other G-20 countries in which he fired a not-so-subtle shot across Berlin's bow. "I am concerned about weak private sector demand and continued heavy reliance on exports by some countries with already large external surpluses," he wrote in a clear reference to Germany. He also warned against reversing economic stimulus policies too soon. "We worked exceptionally hard to restore growth," he wrote. "We cannot let it falter or lose strength now."