The Austerity vs. Stimulus Debate continues.....

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European governments made a “wrong bet” by pushing for austerity measures, Nobel Prize-winning economist Joseph Stiglitz said today.

If Germany, the U.K. and France remain committed to budget cutting, “that will have systemic consequences for the entire Europe,” Stiglitz, 67, said today at a news conference in Budapest. “The belief that markets will get new confidence has been shown wrong” by Ireland’s austerity drive, he said.

Standard & Poor’s last month cut Ireland’s credit rating to AA-, the lowest since 1995, on concern the cost of supporting the nation’s struggling banks will swell the budget deficit. The government plans to narrow the gap to the European Union limit of 3 percent of gross domestic product by 2014 after it swelled to 14.3 percent last year, the highest in the euro region.

Europe’s economy is at risk of sliding back into recession as governments cut spending to reduce budget deficits, Stiglitz, a former chief economist at the World Bank and a professor of economics at Columbia University in New York since 2001, said in an interview with Dublin-based RTE Radio on Aug. 24.

Euro-area governments stepped up efforts to bring deficits in line with the EU limit after the Greek debt crisis eroded investor confidence in the euro region. While the euro-region economy expanded at the fastest pace in four years during the second quarter, the recovery is showing signs of weakening.

The European Central Bank said last week that it expects the economy of the 16 nations sharing the euro to expand about 1.6 percent in 2010 and 1.4 percent in 2011. It previously forecast growth of 1 percent this year and 1.2 percent next.

To contact the reporter on this story: Edith Balazs in Budapest at ebalazs1@bloomberg.net