Austerity strategy – hopes and fears

By Dr Imran Khalid

The kind of anxiety that has enveloped the European Union right now is not an unexpected phenomenon. Ever since the German-backed austerity drive started to become a vogue on the continent, the economists and academia have been talking about the “gathering storm” that would eventually put the European Union on the wave of political and economic distress.

The recent buzz about a possible Greek exit has further jolted the EU that is struggling to recover from the results of the May elections in six European countries that gave clear message that the people on the continent are not happy with the austerity reforms. For many years, German leadership and technocrats had dictated to their profligate southern European neighbors to blatantly implement austerity to manage the continent’s simmering debt crisis.

This was the price the deficit-prone countries of southern Europe had to pay if they wanted the financial assistance from the big and rich brothers in the EU. The idea was that these countries would adopt German economic thinking and standards – lower price inflation and wage growth, more saving and less spending – to counter the debt issue.

Interestingly, this austerity philosophy was readily accepted by most of the EU countries as a novel prescription that would not only solve the acute debt crisis but it would also reduce the disparity among the European economies that would eventually converge to one. The prosperous countries in the EU were not ready to assume the liabilities of the deficit countries without these austerity reforms. The expectations were high and there was a sincere momentum across the continent to execute austerity program in its true spirit.

But the fact is that the austerity measures have so far resulted in some of the unexpected adverse effects that are widening the economic disparity in the EU and directly impacting the daily lives of the inhabitants. Going by the poll results in six countries -- France, Greece, Serbia, Germany, Italy, Armenia – it is very much clear that voters have punished the incumbent leadership which had been pushing for the region-wide austerity measures.

The vicious cycle generated by austerity is very swift one. The process is simple: when the government resorts to cost-cutting, the companies and manufacturers lose significant profits, so they are forced to lay off large numbers of employees to maintain profitability. Consumers have less money to spend. That reduces the government’s tax revenues, augments the nation’s unemployment rate and increases unemployment-benefit payouts.

All this has a direct impact on the living standards. This is exactly what is happening in the EU. For example, in Greece alone, more than 60,000 retailers have been forced to shut down, pushing even more people out of work, including the retailers’ suppliers ― and on and on. Austerity programmes catapult weak economies directly into recession.

So far, 12 of Europe’s 27 nations have been bracketed as “recession-laden.” Spain and Britain are the two most recent states to join the league, while many others are knocking at the door. However, the fact remains that Europe as a whole is still not in bad fiscal shape as such; its debt-to-GDP ratio is better than that of the United States. Similarly, housing and banking - that recently erupted across the Western world - are hardly specific to southern Europe.

Most eurozone crisis countries have relatively prudent fiscal policies; having smaller deficits than Japan, Britain and the United States. Europe s single-minded focus on austerity is a direct outcome of a misdiagnosis of its problems. It is hard to predict about the consequences of Europe s rush to austerity. Will it be long-lasting and severe? Will the crisis further spread? Will the euro survive the brunt of widening yawn among the European economies? At the moment, the answers to these and similar questions is quite difficult.

However, the eurozone members, during the last two years, have been relatively successful in managing some of the acute symptoms of the crisis, albeit at a very high cost. Yet the long-term and bigger challenge remains: making European economies converge — that is, ensuring that their domestic macro-economic behaviors are emphatically homogenized to roll out a single monetary policy at a reasonable cost.

To achieve this objective and to avert a long-term economic catastrophe, both the creditor states (like Germany and France) and the deficit countries in southern Europe must re-align their trends in government spending, competitiveness, inflation, labor costs, private-sector behavior and other areas.

Economies without growth cannot support or sustain debt reduction or structural reform in the European Union - perhaps the most ambitious, impressive and successful model of voluntary international cooperation in world history.

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Yet the long-term and bigger challenge remains: making European economies converge — that is, ensuring that their domestic macro-economic behaviors are emphatically homogenized to roll out a single monetary policy at a reasonable cost.

Why do people still believe that this would or should happen? You can look at any country and you will see that homogeneous development simply doesn't happen. Nowhere. In no time in history. Not in the most free market countries nor the most socialist countries. Nature is chaotic, and that includes anything we do.

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Serbia is not in the EU, not to speak of the Euro zone, and Armenia is not even in the picture. What IS this article about?

Going by the poll results in six countries—France, Greece, Serbia, Germany, Italy, Armenia – it is very much clear that voters have punished the incumbent leadership which had been pushing for the region-wide austerity measures.

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Reform on a basic level is required; austerity in and of itself is counter-productive. Greece and Spain are at opposite ends of the spectrum: the first a barely functioning political entity with endemic corruption and a non-cooperative citizenry; the second, a solid country with stable finances, only burdened by private debt - yet there are similar pressures on both. Austerity for Spain? - that is as ridiculous as it would be for Ireland or Iceland. Let government spending take up the slack in private demand; let markets recover their confidence. That is the way forward.

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Austerity measures, an understanding of the causes that have led to these extreme measures that have now become almost blanket action accross the Euro zone. Initialy the deregulation of the banks, entrusting them to have the fiscal intelligence to regulate themselves. Big mistake.Construction industry, in the beginning there was a shortage of homes to purchase, so new developments sold out very quickly, so each developer continuosly increased the price of completed units easy money, high low risk profits. Banks loaned huge amounts of capital, as land prices rose in conjuntion with the building trade. Building materials and labour price s also rose substantialy. Now anyone with a grain of sense could have forseen the results. Sooner or later prospective home owners would be priced out of the market. Goverments had no complaints whilst they were raking in vast amounts of taxes during the boom, in our case the so called Celtic Tiger.Who pays for the mistakes? Not the banks, thats for sure.They have instead been bailed out with tax payers cash. We have borrwed the bail out money from the IMF and the Eurpean Central Bank, and have to pay interest on these loans. To ensure that the lenders retrieve their investment our budgets are no longer governed by ourselves alone. Austerity measures are demanded.

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I think this article is describing some kind of mythical parallel universe. Austerity measures have not been implemented in any countries. Austerity means cutting costs. All European countries have increased their budgets year over year, not decreased them. They decreased the amount they intended to raise them, but it's still higher than the previous year. This is not austerity. Politicians claim they need austerity, in order to whip the public up into a frenzy, to justify more spending.

NONE of the economic problems hitting the private sector are due to austerity. A cutting of government spending (if it indeed happened, so far it has not) would NOT affect businesses that weren't otherwise being kept afloat by government subsidies.

This article is attempting to perpetuate the myth that government spending is somehow necessary to keep an economy afloat. It is not. It is only necessary to increase the size, scope, reach, and power of the government and her employees.

For a couple of examples, note Canada and Switzerland in recent years. Decreasing spending over the past few years, with a resulting INCREASE in GDP.

Government people love power. They'll use every trick in the book to convince the masses that they, and their budgets, are somehow necessary. They are not.

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Let's at least be clear. When are leaders talk of austerity they mean us, not themselves.

The rich, elite and landed politicians will continue to enjoy lavish lifestyles a la private jets and caviar.

While the rest of us will be asked to cut back on our food, health care, pensions etc.

If they want Austerity they should teach by example.

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