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Europe's Austerity Zeal Risks Another Recession
Europe's "no pain no gain" attitude to solving its sovereign crisis risks exacerbating the bloc's problems, choking off the very growth needed to raise the money to pay down the debt.
From Athens to Dublin, and almost everywhere in between, administrations are imposing wave after wave of spending cuts and tax increases to persuade investors they are serious about improving their public finances and persuade them to start buying euro zone sovereign debt again. But the austerity zeal risks tipping the continent back into recession and a downward spiral of austerity as pitiful growth prospects undermine budgetary targets and ramp up debt burdens, meaning further austerity is required. From Athens to Dublin, and almost everywhere in between, administrations are imposing wave after wave of spending cuts and tax increases to persuade investors they are serious about improving their public finances and persuade them to start buying euro zone sovereign debt again.
The austerity zeal risks tipping the continent back into recession and a downward spiral of austerity as pitiful growth prospects undermine budgetary targets and ramp up debt burdens, meaning further austerity is required.
"The expansionary fiscal contraction story says that you cut, you show you are serious about cutting and then the confidence fairy will come along and she will start pulling in private investment," said Stephen Kinsella, professor of economics at the University of Limerick.
"The expansionary fiscal contraction story is a lie. You don't cut your way to growth."
With the crisis spreading like wildfire through the currency bloc's core, pushing up borrowing costs to unsustainable levels, countries are relying more on blunt budget cuts, than time-consuming and difficult structural reforms, to get results.
The upshot is ballooning dole queues, shuttered businesses and public services stretched to breaking point.
On the streets of Athens and Dublin poverty has visibly increased with more and more homeless people huddling in doorways. In Spain, emergency wards have been shut and in Italy, retailers are struggling to get by.
"Consumption has been falling pretty steadily since the winter of 2008. Normally in a crisis, it starts with menswear and goes to womenswear and children. This time, it's hit them all at once," said Attilio Lebole, head of Textura, a mid-range clothing wholesaler based in Florence.
"Demand is falling, there's no doubt about that. Only foreigners are still shopping."
Despite having an estimated budget deficit this year of 3.8 percent of GDP, below the European average of four percent, Italy has been piling on austerity since the summer, destroying its already poor growth prospects and then responding with still more austerity to make up for the weaker growth.
Italy's dismal growth prospects and an inability to pass growth-enhancing reforms have been the key reasons given by ratings agencies for downgrading the country, not deficit slippage.
"Italy is paying a very high price for lending credibility to Germany's push for greater fiscal discipline across the eurozone," said Nicholas Spiro, head of Spiro Sovereign Strategy.
TERRIFIED OF SPENDING
In the pre-euro days, currency devaluation was the quick-fire route to getting overblown economies back on track. What's needed now is "internal devaluation" to get wages and domestic prices down. But if everyone is cutting back where will the demand come from?
Global growth was meant to be the secret ingredient that kept the Irish economy ticking over while it slashed household income -- down by an estimated 16 percent so far and counting -- but the spread of austerity measures across the euro zone has shrunk its growth prospects and forced Dublin to cut even harder.
Held up as a role model for other indebted nations, the irony is that Ireland's recovery story looks set to be tripped up as others follow suit.
In Spain, the incoming government is hoping that changes to a labor laws, which would untie wages from inflation, as well as measures to aid new businesses would help spur growth despite painful cutbacks.
But analysts are unconvinced and say inevitable austerity measures needed to make tough public deficit targets in 2012 will serve to trim growth even further.
A Reuters poll on November 24 showed the economy not growing at all in 2012. Others like savings bank foundation FUNCAS predict the economy will contract 0.5 percent next year as a result of the impending austerity measures.
"The deficit objectives are so tough that in the short-term it's not going to allow the government room to stimulate the economy or create jobs. There is no fiscal margin to do so," said Angel Laborda, head of research at FUNCAS.
Across the euro zone, retailers are bracing themselves for yet another drop in Christmas cheer as sales taxes are hiked in Italy, Greece and Ireland.
The Greek Commerce Confederation (ESEE) is predicting a 22 to 30 percent fall in retail sales, with per capita spending seen dropping to 288 euros from 410 last year and 550 euros in 2009.
And the New Year isn't looking much better. Last week's European summit laid out plans for balanced budgets implying austerity budgets for years ahead for many European states.
Hilary Behan has already closed three of her six children's clothes stores in Ireland, cut her staff from 38 to 20 and asked her store managers to take pay cuts of between 10 and 15 percent. Sales are down by over a third since 2008.
"It just keeps getting worse and that's the worrying thing there is no sign of any recovery. Every time the government get a chance they remove any chance of there being any sort of a recovery," she said.
"It's not even the amount of money that they are taking from people it's the constant battering. People are terrified to spend."
(Additional reporting by Giulio Piovaccari in Rome, George Georgiopoulos in Athens and Nigel Davies in Madrid. Editing by Jeremy Gaunt.)
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15 Comments so far
Show Allyea but austerity drives down the wage scale and gets rid of workers benefits
and eliminates more and more of the middle class
its like one king of a third world country said when a reporter asked him why he was let at least 50% of his citizens face starvation
and he said
"at least if they are wondering how they are going to get their next meal, then they will not be in a position to rise up against me"
the rich like people in poverty
Thanks, djb, for your comment!
From Aristophanes (ca. 446 BC - ca. 386 BC), THE WASPS (422 BC): “The truth is, they want you, you see, to be poor. If you don’t know the reason, I’ll tell you. It’s to train you to know who your tamer is. Then, whenever he gives you a whistle and sets you against an opponent of his, you jump out and tear them to pieces.”
Austerity is here in the USA. We walk by a strip mall everyday and this year the cars in the lot are the same volume as any other time of year. People in this town are not spending for Christmas.
All true, but the south Europeans are retiring in their 50s, getting paid for government jobs they don't do, etc. Also, face it, moms have been having too many babies. Mother earth gets the last word. Greed and worthless government leadership just make everything worse. God help us all.
this piece has no apparent point other than the banal observation that "austerity" is a self-reinforcing spiral. we're told that in the pre-euro days, countries that had no chance of paying back their sovereign debts would simply devalue their currencies and, effectively, default -- but without missing a payment. what the article ignores is the reality that since that option is no longer available, there will have to be some other form of actual or de facto default. money that can't be paid back, won't be paid back. and for some reason the fine folks at reuters seem not to want to acknowledge that the (largely) german and french banks that lent this money -- loans as idiotic and self-serving as the "sub-prime" loans made by american banks to penniless home-buyers here -- will have to absorb most of these losses. "austerity" is the orwellian lingo being used to attempt to foist as much of the debt as possible onto taxpayers and prevent the bankruptcy of the banks themselves; the mainstream press has embraced this absurd construct of "reality," just as it did with Hank Paulson's bailout doomsday scenario here. i would hope that the editors of Common Dreams would run pieces of a higher standard.
Actually, especially coming off of Reuters no less, this article is quite remarkable. It admits that the austerity regime inflicted on the public across the Eurozone is making everything worse.
Almost every economist who is not an ideological boot-licker for the plutocracy argues thus: austerity pushes you back into a recession, which ultimately makes the deficit worse.
http://www.counterpunch.org/2011/12/06/wrecking-the-world-economy/
So why the fanatic dedication to austerity policies among ruling elites even though all empirical evidence suggests they are economic poison pills?
It makes the bankers fat & happy. Bankers, of course, being a metonymy for the entire 'financial sector' which includes hedge funds, banks, private equity vultures, etc.
If austerity measures elicit screams of pain from the public sector then somewhere a banker smiles.
The key quote in the article:
'"The expansionary fiscal contraction story says that you cut, you show you are serious about cutting and then the confidence fairy will come along and she will start pulling in private investment," said Stephen Kinsella, professor of economics at the University of Limerick.
"The expansionary fiscal contraction story is a lie. You don't cut your way to growth."
However, you can cut your way to 'privatization' and greater profits for the financial elites.'
A road out of the crisis?
Well, until someone jump starts the economy by charging $5 a ticket for admittance to the public hangings of upstanding individuals such as Robert Rubin and Fred Goodwin-- to pick a couple of fine candidates at random-- then apparently the whole world will continue to be held hostage by the financial titans.
http://www.thedailybeast.com/newsweek/2008/12/01/the-world-s-worst-banker.html
Vulture capitalism is not only strangling our economies, it is destroying the biosphere of the planet.
The "sub-prime" loans made by american banks to penniless home-buyers" wasn't just confined to America as they'd sold those loans, as derivatives (given Triple A Credit ratings by such as Standard & Poor (sic?) etc, around the world hence the initial global crash of 2008 which all this is simply the aftershocks of, inasmuch as it left most countries badly in debt due to bailing out their various banks. These austerity measures will shortly be enshrined in the EU treaty, so no alternative attempt at Keynsian stimulus will be possible, in that part of that treaty states no country can spend more than 3% of it's GDP in the Public Sector. Signed by all 26 member states except UK which veto-ed it though not for this reason.
I can only hope that Mondragón's General Assembly is thinking about the opportunity this presents.
Afaik, Mondragón has always been 100% self-financed, with the owner-members taking no more pay from the profits when times were tough than they needed to subsist on, the rest going into building the network both vertically and horizontally.
In principle, Mondragón could become Europe's economy, by expanding into and taking over the sectors where the rich are trying to put the boots to the workers. "Put us in power - you'll never get rich, but nor will those rich buggers be able to stay rich by squeezing you, either. And you'll have a roof over your head and food on the table every day."
Why is the austerity myth so convincing? Why do politicians subscribe to it and voters put politicians who subscribe to the theory in power? It may be the power of an easily made but ultimately false analogy that the conduct of personal finance equates to a nation's conduct of its fiscal policy. I have only been seriously constrained by my credit card spending a few times in my life and I have an excellent credit score because I learned the serious penalties of misusing credit. When I did get a bit behind I did tighten my belt and sacrifice spending on other items to make up the difference and I did pull out of the hole I was in. I don't think I will ever buy four new tires for my car on credit ever again. Many have had similar experiences to mine so when the president likens our national debt to credit car debt and calls on us to "tighten our belts" there is an immediate ressonance. However the analogy really doesn't get us very far. When I was paying off my credit card I was still working. Although I gave up spending on certain things which I might call luxuries I did not actually have to starve myself. I did not lose weight or have to actually tighten my belt in that period of austerity. My overall spending did not go contract either--it merely was allocated in a slightly different way and when my situation improved it did not mean that I would spend more on consumer items either.
When our economy contracts and people lose their jobs they are not more likely to hold onto their homes or pay down their debt. The lack of demand creates a downward spiral where no matter how cheap or depriciated goods become they are still too expensive to buy because income has gone down even more. Demand for government services however does go up in hard times and is counter cyclical. Economists since Keynes have known this and known that only government action can pull us out of downturn by being the demand creator of last resort. The payback to come in the nation's future by taxation when it is less of a burden because of the growth stimulated. Time and again it has been shown to work. It's in the text books. If Obama or Cameron were to take Econ 101 and proposed austerity as a solution for an economic downturn they would flunk the course. They and the Republicans who advocate it should get a failing grade from the voting public too and be denied the chance to take the course over again.
Why is the austerity myth so convincing? Why do politicians subscribe to it and voters put politicians who subscribe to the theory in power? It may be the power of an easily made but ultimately false analogy that the conduct of personal finance equates to a nation's conduct of its fiscal policy.
I'm sure you're right about the analogy, from the people's standpoint. But the pols know damned well that it's a lie. It's just another way to squeeze us.
Grow grow grow your boats greedily down to sea verily verily verily verily there is no room left for me.
In the pre-euro days, currency devaluation was the quick-fire route to getting overblown economies back on track. What's needed now is "internal devaluation" to get wages and domestic prices down. But if everyone is cutting back where will the demand come from?
i don't care to argue over money, because money has no constant value. we hear about the market's "invisible hand" and a lot of folks believe the hype of some unfathonable natural law of ecomics causes the ups and downs. not so. the economic woes of the world's 99% stem from industrial misleaders yanking the strings of well-placed government "officials" sycophants on every continent. every time i hear a tee-vee news proagator talk about "good news" of a slow or "jobless" recovery i know the bubblehead speaks only about what matter to the very few. people who have lost jobs and homes and people who fear their job may be on the chopping block or fight against imminant foreclosure take no delight when markets jump; exciting only to members of international gamblers annomymous.
austerity zeal risks tipping the continent back into recession
the international economy took a dose dive back in 2007-perhaps earlier and we've been in recession ever since. most alarming should be the GLOBAL LAND GRABS because like all of earth's vital resources, the land has real value. the economy sinks while the debt looms ever larger. below a few excerpts from yesterday's Democracy Now! broadcast.
So, that’s what—the failure, in terms of every major public policy issue, to serve the public interest can be attributed to that corrupting influence of money.~
And the next generation—it’s like we’ve taken out this credit card in the name of our children and just ran it up recklessly, not bringing in the revenues to help pay it down. We’re paying more in interest payments—total waste—more in interest payments every year on the accumulated debt than it takes to run 13 departments of the federal government. We can do much better than this as a country. And we, as a people, need to understand, we can do this from the bottom up.--Rocky Anderson
Growth may cure our economic ills but the wrong kind of growth will feed our ecological ills. So little talk of sustainable economies; it's all about revving the same old economic engine of growth and consumption again so we can continue racing towards the cliff.
There's no "toward" left. We're either perched on the crumbling edge, if we're lucky, or doing a Wile E. Coyote act in midair, but with no scriptwriter to resurrect us after the splat.
The sole motivation, the whole reason, for replacing democratically elected governments and for imposing poverty, is to try to prevent some big banks in Germany and France from losing a lot of money because they made unsecured loans to nations that cannot pay them back. Who's fault is that? The bank officers who made the loans. And still, we keep making our banks bigger and bigger. Every bank should be of the right size that it can fail, and should fail, if it makes bad decisions.