German Finance Minister Wolfgang Schaeuble said the global economy may see "seven lean years" as a result of needed fiscal consolidation programmes, even as top U.S. economists questioned the effectiveness of austerity measures.
In a speech at a meeting of Nobel laureates at the University of St. Gallen in Switzerland, Schaeuble said it may take years for austerity measures to bear fruit.
"There might well be seven lean years ahead for the world economy," Schaeuble said, pointing to a "trade off between short term-pain and long-term gain."
The Finance Minister underlined the need for closer cooperation on economic policy in Europe to secure long-term growth.
"But for this to happen, immediate fiscal consolidation and structural reforms in Italy, Spain, Portugal and Greece are of the essence," he said.
Earlier in the week Schaeuble had met French counterpart Francois Baroin to discuss plans for a Europe-wide tax on financial transactions as part of a bilateral drive for closer economic coordination between euro zone states.
Germany is prepared to lead the way with initiatives such as a financial transaction tax or a short selling ban, Schaeuble said, even if a broader consensus in favour of such measures has yet to evolve.
Although the measures may take a while to implement, and Europe could only move ahead one step at a time, "the direction in which we have to go is not disputed," Schaeuble said.
AUSTERITY NOT THE ANSWER
Europe's strategy to fight its sovereign debt crisis with one austerity package after the next has not only led to street protests in Athens and Madrid, but has also drawn criticism from some of the brightest economists in the world.
At their four-day meeting on the island of Lindau in Lake Constance, southern Germany, 17 Nobel economics laureates have discussed the causes and lessons from the 2008 financial crisis. The conference moved for its final day on Saturday across Lake Constance to St. Gallen in Switzerland.
One conclusion was that austerity measures were the wrong way to bring the global economy back to growth.
"That austerity approach is an approach that has been tried over and over again," Joseph Stiglitz, 2001 economic science Nobel laureate, said at a conference referring to the great depression in the United States in 1929, the Argentinian and the East Asian crises.
"In almost every one of these cases, the economy goes from a downturn to recession and from recession to depression. Why countries are voluntarily doing that in Europe is beyond me," he said.
Eric Maskin, who shared the economics prize with Leonid Hurwicz and Roger Myerson in 2007, said: "Austerity measures just make it worse."
Nonetheless, there is hope among the laureates that Europe will be able to fix its problems.
"Crises like this don't get solved quickly," said Robert Mundell, 1999 economics prize winner for his analysis of optimum currency areas.
"The big hope would be that you'll begin to see the end of it when the adjustments have been made that are going to put things back in order and do the things are needed now to put the pieces back in order so that Europe has got a healthy financial track going for it," he said.
"I hope it'll be done in the next two years," he added.