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ANALYSIS-Europe faces rows over where spending cuts fall

Published 01/21/2010, 10:02 AM
Updated 01/21/2010, 10:06 AM

* Spending cuts required across much of Europe

* Officials, companies, interest groups lobbying furiously

* Almost everyone wants their area ringfenced from cuts

* UK defence chiefs already publicly disagreeing

By Peter Apps, Political Risk Correspondent

LONDON, Jan 21 (Reuters) - With spending cuts speeding over the horizon across Europe, officials, companies, charities and unions are engaging in increasingly open warfare to make sure the axe falls on someone else.

Credit ratings agencies, bond markets, the European Union and the International Monetary Fund are pushing treasuries to address budget deficits and rein in expenditure, prompting difficult choices for policymakers.

Emerging Europe had to begin to tackle deficits last year, often as a condition of IMF or EU aid packages, while richer economies were able to indulge in stimulus spending to soften the impact of recession. Now, Western Europe must cut too.

In Britain, with elections looming before June, all three major political parties are committed to reducing outgoings but have held back on specifics.

Opposition Conservative leader David Cameron stares down from posters across Britain with a tagline pledging to cut the deficit but not the National Health Service (NHS).

There is no reference to where other cuts would be.

Polls suggest that while the Conservatives will likely gain most votes, they may lack an overall majority prompting a hung parliament that markets fear would make policy-making tough.

"Many sacred cows will have to be sacrificed in the years ahead and this will require imagination, leadership and courage," Royal Bank of Canada global fixed income strategist Russell Jones wrote in a note.

"The danger is that because of the political situation, the country is instead left with weak government, temporary expedients and initiatives that are the lowest common denominator of long and exhausting negotiation."

Meanwhile, a variety of interested parties from the public, private and charitable sectors set out their stalls.

"WELL ARTICULATED DEBATE"

In one of the most blatant spats so far, the chiefs of Britain's Army and Royal Navy this week publicly faced off with competing pitches to safeguard their own services.

Army chief General David Richards pointed to the experience of Afghanistan and the importance of "boots on the ground" over expensive large projects, while Admiral Mark Stanhope prioritised aircraft carriers.

Stanhope said they were not "at loggerheads" but were engaging in a "well-articulated debate".

Charities representing groups from underprivileged children to Alzheimer's sufferers want spending on their particular areas safeguarded or ideally increased, while companies that have benefited from public spending -- for example, infrastructure firms such as Balfour Beatty would like it to continue.

A simple glance at the stories dominating British news on Thursday shows the political difficulty of limiting spending.

The Royal College of Surgeons complained financial restrictions were preventing doctors from carrying out stomach-reduction surgery on the highly obese, saying it was unethical to deny people treatment they sorely needed.

Meanwhile, ministers were castigated by opposition parties after it emerged counter-terrorism funding in Pakistan had been cut following sharp falls in the value of sterling -- effectively a call to increase spending to offset the currency move.

With both, there is a case that spending now reduces the long-term costs of obesity or militant attacks -- but the bottom line is that markets and ratings agencies want sharp cuts now.

Failure to do so risks pressure on sterling and makes borrowing money in international markets more expensive.

LATVIA, GREECE FACE BATTLES

Even Conservative pledges to maintain health and international aid spending might well still mean growing budget strains, with an ageing population increasing demands on the NHS and any further sterling falls hitting the value of British aid.

Central and Eastern European countries have already struggled with the political realities of cutting, prompting several IMF programmes to be suspended amid political paralysis.

Latvia has been battling this issue since June. Attempts to fix judicial salaries were overturned by the courts, while the health minister resigned saying that as a doctor he could not in all conscience agree to the service reductions.

But there has been no widespread civil unrest since early last year, unions have largely avoided confrontation and public sector workers seem to have swallowed significant pay cuts -- although the situation might become more unstable ahead of elections later this year.

Greece is just starting the process under heavy pressure from ratings agencies, markets and the European Union, saying it will cut the budget deficit to 2.8 percent of gross domestic product in 2012 compared with 12.7 percent in 2009.

The government has outlined a 3-4 percent salary reduction for public servants and tax rises for most Greeks, but analysts say details are still lacking on where other cuts will fall.

Angered at the steps already announced, Greek public and private sector unions have already called strikes for February. But concerns of wider unrest might be overblown, with opinion polls suggesting 55-60 percent of voters would back cuts if applied fairly.

But "fairness" is not always a neatly defined concept.

"We will accept the measures even if they are harsh, provided they are fair to lower incomes," said public servant Maria Arvaniti, 40. "But if they are not fair, I will go out on the streets. Those who brought our economy to this disgrace must pay, they must give us our money back." (Editing by Jon Boyle)

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