Europe’s Austerity Madness

So much for complacency. Just a few days ago, conventional wisdom was that Europe finally had things under control. European Central Bank, by promising to buy bonds of troubled governments if necessary, had soothed markets. All that the debtor nations had to do, story went, was agree to more and deeper austerity, the condition for central bank loans, and all would be well. But the purveyors of conventional wisdom forgot that people were involved. Suddenly, Spain and Greece are being racked by strikes and huge demonstrations. The public in these countries is, in effect, saying that it has reached its limit: With unemployment at Great Depression levels and with an erstwhile middle-class workers reduced to picking through garbage in search of food, austerity has already gone too far. And this means that there may not be a deal after all. (source: Paul Krugman – NYTimes – 28/09/2012)

Much commentary suggests that the citizens of Spain and Greece are just delaying the inevitable, protesting against sacrifices that must, in fact, be made. But the truth is that the protesters are right. More austerity serves no useful purpose; the truly irrational players here are “the allegedly serious” politicians and officials demanding ever more pain. Consider Spain’s woes. What is the real economic problem? Basically, Spain is suffering a hangover from a huge housing bubble, which caused both an economic boom and a period of inflation that left Spanish industry uncompetitive with the rest of Europe. When the “huge” bubble burst, Spain was left with difficult problem of regaining competitiveness, a painful process that will take years. Unless Spain leaves the euro, a step nobody wants to take, it is condemned to years of high unemployment. But this arguably inevitable suffering is being greatly magnified by harsh spending cuts; and these spending cuts are a case of inflicting pain for the sake of inflicting pain. First of all, Spain didn’t get into trouble because its government was profligate. On the contrary, on the eve of the crisis, Spain actually had a budget surplus and low debt. Large deficits emerged when economy tanked, taking revenues with it, but, even so, Spain doesn’t appear to have all that high a debt burden. It’s true Spain is now having trouble borrowing to finance its deficits. That trouble is, however, mainly because of fears about the nation’s broader difficulties, not least fear of political turmoil in face of very high unemployment. And shaving a few points off the budget deficit won’t resolve those fears. In fact, research by the International Monetary Fund suggests spending cuts in deeply depressed economies may actually reduce investor confidence because they accelerate the pace of economic decline. In other words, the straight economics of the situation suggests Spain doesn’t need more austerity. It shouldn’t throw a party, and, in fact, it probably has no alternative (short of euro exit) to a protracted period of hard times. But savage cuts to essential public services, to aid to needy, and so on actually hurt country’s prospects for successful adjustment.

Why, then, are there demands for ever more pain? Part of the explanation is that in Europe, as in America, far too many “Very Serious People” have been taken in by the cult of austerity, by the belief that budget deficits, not mass unemployment, are clear and present danger, and that deficit reduction will somehow solve a problem brought on by private sector excess. Beyond that, a significant part of public opinion in Europe’s core, above all, in Germany, is deeply committed to a false view of the situation. Talk to German officials and they will portray euro crisis as a morality play, a tale of countries that lived high and now face the inevitable reckoning. Never mind the fact that this isn’t at all what happened and the equally inconvenient fact that German banks played a large role in inflating Spain’s housing bubble. Sin and its consequences is their story, and they’re sticking to it. Worse yet, this is what many German voters believe, largely because it’s what politicians have told them. And fear of a backlash from voters who believe, wrongly, that they’re being put on the hook for the consequences of southern European irresponsibility leaves German politicians unwilling to approve essential emergency lending to Spain and other troubled nations unless borrowers are punished first. Of course, that’s not the way these demands are portrayed. But that’s what it really comes down to. And it’s long past time to put an end to this cruel nonsense. If Germany really wants to “save” the euro, it should let the ECB do what’s necessary to rescue debtor nations and it should do so without demanding more pointless pain. 

Acerca de ignaciocovelo
Consultor Internacional

2 Responses to Europe’s Austerity Madness

  1. Professor Uziel Nogueira says: The euro zone is a monetary engineering experiment that is failing. In any integration process, a common currency without fiscal integration cannot survive the stress of unsustainable public debt. In turn, fiscal integration implies political integration i.e., a President and Parliament of a United States of Europe.


    The political leadership of the 17 euro member countries are neither willing nor prepared to go for political integration during times of economic and political duress.

    Prof PK policy recommendation to get the euro zone out of the mess — the ECB printing money for nothing like the FED– will not fly with Germany. This is a typical economic problem without any ‘first best’ solution. Eventually, the crisis will be exhausted by its own dynamics i.e., over indebted countries realizing that the common currency is a PROBLEM and not a SOLUTION. The Greeks already know that fact and their exit from the common currency will be politically and socially messy. The euro zone is a ship navigating on uncharted waters with crew members, Greeks and Spaniards so far, beginning to mutiny. A modern version of Mutiny on the Bounty with a German captain instead of Marlon Brando.

    http://www.nytimes.com/2012/09/28/opinion/krugman-europes-austerity-madness.html

  2. (…..) ECONOMICS AND MORALITY. Mario Monti, Italy’s prime minister, quips that, for Germany, “economics is a branch of moral philosophy”. Countries must pay for sins of commission (budget deficits) and omission (poor bank supervision). Only then can there perhaps be more European integration to avert problems in the future. Yet there is little point in worrying about tomorrow’s woes when today’s crisis is unresolved. Germany is right to fret that relieving market pressure on debtors could create moral hazard and slow down badly needed reforms. Equally, though, moral hazard applies to creditors. When the pressure is off, Germany shows too little urgency about repairing the euro. There is a cost to delay and prevarication. It is harder for countries to reform without hope that their agony will end. Germany’s unwillingness to act except in the most dire moments condemns the euro zone to one acute crisis after another. In the short term Mrs Merkel may thus find herself fighting for re-election next year with the euro zone back in flames. In the longer term a chronic crisis is already creating permanent damage: prolonged economic stagnation and depression in deficit countries, loss of confidence in the credibility of governments and the future of the euro, and increasingly poisonous politics.


    Germany may fear the “legacy” costs of past mistakes. But it should also worry about the legacy of its hesitation and inaction.

    http://www.economist.com/node/21563741

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