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Gloves off: Summers and Osborne slug it out over austerity

Larry Summers rarely shies away from controversy, and discussing monetary policy with U.K. finance minister George Osborne is no different.

Summers, who was tipped as the next Chairman of the Federal Reserve last year, told Osborne he missed a trick on stimulating the U.K. economy.

The U.K. finance minister fought back by pointing out that Summers had got it wrong when he warned that U.K. austerity would not work.

British Chancellor of the Exchequer George Osborne attends the CNBC  session at the World Economic Forum in Davos.
Eric Piermont | AFP | Getty Images
British Chancellor of the Exchequer George Osborne attends the CNBC session at the World Economic Forum in Davos.

(Read more: Osborne defends Carney on forward guidance)

The debate, at a CNBC panel at the World Economic Forum in Davos, was heated for an event where the emphasis is generally on consensus.

Summers said that it was a "fair comment" that he was wrong on U.K. austerity, after a better-than-expected return to growth in the U.K., but pointed out that the country is still not back to its pre-crisis growth peak. Osborne countered that the U.K. had a deeper recession than the U.S., and a much larger banking sector as a proportion of the economy, making it more difficult to recover.

Summers has repeatedly criticized Osborne's "Plan A" of public spending cuts, and the government's support of the mortgage market, saying last year: "I have had some difficulty following the logic of British policy."

"Both expose tax payers to risk of loss."

The two agreed on the importance of Europe to the U.K. recovery, however.

"The Chancellor highlights the similarities and the risks associated with the other countries of Europe and I would see Europe's difficulties in those increases in bond yields as centrally related to the fixed exchange rate, the absence of a central bank, and the uncertainties that would be created if for example a U.S. state were to pursue a massive fiscal expansion," Summers said.

- By CNBC's Catherine Boyle. Twitter: @cboylecnbc.

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