The Meaning of “Austerity Measures” in the Eurozone
by Mike Whitney
April 29, 2012
The eurozone is slipping into a recession that could have been avoided. Had policymakers provided fiscal support for stricken countries in the South and guarantees on their government bonds, (as the USG does for US Treasuries) then their economies could have continued to grow while the necessary reforms were put in place. But the Troika (The IMF, the ECB, and the European Commission) decided to make the bailouts conditional on member states’ acceptance of harsh austerity measures which forced leaders to slash government payrolls, services and programs. The result was entirely predictable; economic activity began to sputter as one country after another succumbed to a vicious slump.
So the downturn was a basically matter of choice, a self-inflicted wound brought on by poor decision-making in Brussels and Frankfurt. Anyone could see what the result was going to be because contractionary policy leads to economic contraction. Implement policies that are designed to shrink the economy, then the economy will shrink.
For the last month or so, the focus has mainly been on Spain, and for good reason. Spain’s banking system is crumbling beneath the weight of tens of billions in non performing loans generated by the gigantic housing bubble which is still deflating. Unemployment in Spain is the highest in Europe at 24 percent. (Youth unemployment is over 50 percent) Even so, Spain’s right wing PM Mariano Rajoy is attempting to reach the deficit targets demanded by the troika which will push unemployment higher while further deepening the depression. According to Der Speigel:
“The prime minister recently announced that he wants to reduce expenditures in the country’s education and health system by €10 billion. …. To meet the demands of the central government, the regions would have to slash 80,000 out of 500,000 teaching positions.”
As you can see, austerity measures and debt consolidation are only adding to Spain’s woes. Eventually, after much unnecessary misery, Spain will require a bailout, although ECB president Mario Draghi insists that this is not so.
But Europe’s problems are not limited to Spain or countries on the periphery. France’s output has slipped for a second month in a row and the pace of the decline is accelerating. The service sector is also showing signs of distress as belt tightening measures take hold and gradually reduce aggregate demand. Unemployment is edging higher as the slump deepens. According to data from Eurostat the seasonally adjusted jobless rate in France reached 10 percent in April, a 12 year high. Ballooning unemployment has led to an uptick in poverty which now affects 13.5 percent of the population. Austerity measures have led to a decline in personal consumption, an erosion of confidence, and a more generalised slowdown across all sectors. Still, intractable bankers and bureaucrats in Brussels and Frankfurt have not veered one bit from the original policy. They remain steadfast in their commitment to austerity.
Here’s Draghi defending austerity in an interview with the Wall Street Journal:
“There was no alternative to fiscal consolidation, and we should not deny that this is contractionary in the short term. In the future there will be the so-called confidence channel, which will reactivate growth; but it’s not something that happens immediately, and that’s why structural reforms are so important, because the short-term contraction will be succeeded by long-term sustainable growth only if these reforms are in place.” (“Q&A: ECB President Mario Draghi”, Wall Street Journal)