The struggling countries of Europe have cut spending for two years in hopes of averting financial catastrophe and persuading bond investors to buy their debt.
But the world's most influential bond investor thinks it won't work.
Bill Gross, manager of Pimco's $252 billion Total Return Fund, the largest mutual fund, says that countries can't simply cut their way out of the debt crisis. That's bound to backfire, he says.
The countries that use the euro reduced their budget deficits last year, but their economies shrank, too. As a result, their debt increased as a share of their annual economic output. Eight of the 17 euro countries are in recession.
Meanwhile, unemployment in the so-called eurozone is almost 11 percent and rising. Outrage over spending cuts led voters last weekend to oust leaders in Greece and France who had promoted cuts as a way out of the crisis.
Some questions and answers with the man sometimes called the bond king:
>Q: What do you make of the backlash in Europe against deep spending cuts? They were supposed to lure investors like you into buying government bonds from Greece, Portugal, Spain and the like. It doesn't seem to be working.
A: We do look at the debt levels. It matters. But a bond investor has to look at economic growth, too. If a country can't grow its way out of its predicament, we won't go there. That's why we've stayed out of Europe for the most part.
>Q: So the so-called austerity approach -- tightening government budgets through spending cuts and tax increases -- isn't enough for you. A country can't keep cutting spending and hope that prosperity eventually shows up?
A: No, that doesn't work. Eliminating a budget deficit won't produce growth. It really requires a delicate combination of growth and budget discipline over the longer term. Policymakers have it tough.
>Q: Paul Krugman, the economist and columnist for The New York Times, has been saying this for years. It's the lesson of the Great Depression: Tightening budgets in the face of an economic slump only makes the slump worse.
A: I'm not a big Krugman advocate. But I agree that you don't cut everything and hope the private markets reward you for it. It has to be a balance. What Europe really needs is to get the private market back in there. They're trying to convince the Pimcos of the world to return (by having the European Central Bank lend to banks), but all the efforts so far use public money. The global marketplace is privately funded. And if the private markets can't be convinced, this crisis is going to be with us for a very long time.
>Q: What would it take to convince you to buy bonds from one of the troubled countries?
A: It takes economic growth, honestly. And it also takes policies that last longer than one or two months. We haven't avoided Europe, entirely. We invest in Germany and France. But we avoid the bad boys and girls because there doesn't appear to be a growth solution to these countries' problems.