The debt problems in Europe and other nations are leading many governments to implement major initiatives to scale back their deficits. But two top financial minds say that stricter budgetary measures may in fact have the opposite impact as desired.

In his latest market commentary, PIMCO’s Bill Gross says that “fiscal tightening, while conservative in intent, leads to lower and lower growth in the short run. Tougher sovereign budgets produce government worker layoffs, pay cuts, reduced pension benefits and a drag on consumption and the ability of the private sector to accept an attempted hand-off from fiscal authorities. Recession becomes the fait accompli, and the deficit/GDP ratio moves ever higher because of skyrocketing risk premiums and a plunging GDP denominator. In many cases therefore, it may not be possible for a country to escape a debt crisis by reducing deficits!”

Gross says a relative few countries that had good initial conditions (including relatively low debt as a percentage of GDP, the ability to produce low/negative short-term policy rates and constructively direct fiscal deficit spending towards growth positive investments) could be able to spend their way out of the problem — the U.S. among them.

But overall, Gross continues to see a “New Normal” for growth and investment returns. “Fiscal tightening and budget conservatism may have come too late for Greece and its global look-alikes,” he says. “Continued deficit spending may be an exorbitant privilege extended to only a few. Caught in the middle are many developed countries that likely face New Normal growth rates and a continued bumpy journey toward that destination.”

Nobel Prize-winning economist Paul Krugman, meanwhile, says budget cutbacks or tightened interest rates — both of which are now becoming part of the “conventional wisdom” for what the world needs — could have serious negative impacts. “Both textbook economics and experience say that slashing spending when you’re still suffering from high unemployment is a really bad idea — not only does it deepen the slump, but it does little to improve the budget outlook, because much of what governments save by spending less they lose as a weaker economy depresses tax receipts,” he writes in his latest New York Times column.

Krugman says calls for tightening budgets and/or cutting rates are “already having ugly consequences,” including Congress failing to act on a bill to extend assistance to the long-term unemployed. “As a result, many American families are about to lose unemployment benefits, health insurance, or both — and as these families are forced to slash spending, they will endanger the jobs of many more,” he says. “And that’s just the beginning. More and more, conventional wisdom says that the responsible thing is to make the unemployed suffer. And while the benefits from inflicting pain are an illusion, the pain itself will be all too real.”