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Germany, U.K. prepare to make painful cuts
LUXEMBOURG -- Europe's economic picture darkened further Monday as Britain's prime minister declared the nation's finances to be worse than feared -- requiring sacrifices that will affect "our very way of life" -- and the euro slid further toward parity with the dollar.
From small EU nations like Hungary and Greece to big ones like Germany, which on Monday announced its own harsh austerity measures, the continent's economic and fiscal crisis is showing no sign of letting up.
Germany, Europe's economic powerhouse, promised a raft of spending cuts, vowing to "set an example" for heavily indebted Greece, Spain and Portugal, which are buckling under their debt loads and threaten to drag Europe's currency union down with them.
With even an unprecedented multi-billion dollar rescue package failing to fully convince investors, European nations are scrambling to regain credibility and shore up market confidence by proving they can get their houses in order.
There is no doubt the cuts will be painful, and government leaders are preparing their citizens for the blow.
German Chancellor Angela Merkel says Germany needs to save $96 billion through 2014 by reducing handouts to parents, cutting 15,000 government jobs and delaying projects such as construction of a replica of a Prussian palace in Berlin.
British Prime Minister David Cameron warned in a speech of painful cutbacks that may shape the nation for an entire generation and are necessary because "the overall scale of the problem is even worse than we thought."
"How we deal with these things will affect our economy, our society -- indeed our whole way of life," he said. "The decisions we make will affect every single person in our country. And the effects of those decisions will stay with us for years, perhaps decades to come."
Cameron's government will announce cuts at a June 22 emergency budget, less than two months after coming to power at the head of Conservative-Liberal Democrat coalition. On Monday, he remained vague on details of how his government plans to close its record deficit, which reached $221.5 billion or 10.9 percent of economic output in the last fiscal year.
German and British efforts to close their budget deficits -- or the yearly gap in government spending and revenue -- come after Spain and Portugal were ordered to toughen austerity programs to keep them from needing a bailout like Greece.
Markets are still jittery despite EU nations' pledge last month to rescue any of the region's members with a "shock and awe" financial rescue package of $1 trillion that still is vague in its details.
The tensions in markets were evident in the euro's slide to a series of four-year lows in recent days. The latest drop came after some Hungarian officials warned that their country is close to default -- two years after it received a bailout from the EU and the IMF.
Hungary's government tried to downplay the comments, but that failed to lift the euro much above the $1.19 level.
Finance ministers from the 16 eurozone nations shrugged off the tumbling value of their currency as they arrived for Monday talks in Luxembourg on their economy. Belgium's Didier Reynders even welcomed the drop as it makes exports more competitive.
However, Luxembourg Prime Minister Jean-Claude Juncker -- who leads the eurozone finance group -- said he was "concerned about the abruptness of the fall."
The eurozone faces a slow economic recovery that is currently relying far more on exports than growth at home, where people are still reluctant to spend and companies aren't keen to take on new hires.
Unemployment in the eurozone reached a 10-year high of 10.1 percent in April. This adds extra welfare costs to governments saddled with lower tax revenue and debt that has soared since they paid out hundreds of billions to shore up the region's banking system.
Perhaps frightened by the near-bankruptcy of Greece, European nations are now prioritizing budget cutbacks over stimulus spending -- in sharp contrast with the United States, which has called on other countries to be cautious about removing government spending that supports growth.
EU Economy Commissioner Olli Rehn said in an opinion piece to be published in French daily Le Monde today that Europe is "not out of danger" and budget cuts should be in place by 2011, when he expects growth to pick up.
Merkel says Germany -- which has reluctantly provided the biggest national share of the euro rescue package and the earlier bailout for Greece -- "has the outstanding task of setting a good example."
Although her government's budget deficit -- at 5 percent of GDP this year -- is much lower than most, it is still well above a 3 percent EU limit.
Monday's talks between eurozone finance ministers will be followed by a meeting of most European Union finance ministers and EU officials who will thrash out plans for long-term ways to avoid a new economic crisis, including a proposal for more EU oversight of national budgets.