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Eurozone Austerity May Be Coming to an End

Posted on May 6, 2013 at 11:50 AM

From US News Blog

There is no question that the extreme austerity debate has shifted in the eurozone. The public debate and policy implementation of austerity seem to have buckled under pressure from anti- austerity protesters. In an earlier column I had mentioned that when French Socialist President Francois Hollande came into power the nature of the European austerity game would change, and it has.

German Chancellor Merkel's repeated public calls to continue strict austerity have been falling on deaf ears. The reason is quite simple: the economic and social pain austerity has created on the ground are too hard.

Some say that modern Europeans in the north and south are now used to a more cushioned life, and the austerity medicine is too much of a bitter pill to swallow. Remember austerity, like development and environmental issues, is a choice of either looking after the working citizens of today or their children's children in the future. The message in Europe is clear: the working citizens of today want to be looked after now.

While, of course, they worry about their grandchildren, their immediate needs overrule that worry for now. Who can blame them? I wager nowadays most working citizens, in most countries, would do the same. This seems to be a public acknowledgment in Europe that extreme austerity has seen its day.

Extreme austerity measures have one concrete result. You are assured that, in the short run, growth will be stifled. The eurozone is yielding zero to negative economic growth. As the International Monetary Fund's Managing Director Christine Lagarde said recently "now might be the time to consider slowing the pace of austerity."

The new buzzwords in Europe are growth and job creation. The European Commission's President Jose Manual Barroso had this to say about austerity: "While I think this policy is fundamentally right, I think it has reached its limits." Of course, the limits he is talking about are not economic but political in nature. Slow growth slows down the race towards a healthy economy and a contented population.

For example, slow growth yields less tax revenue and mandates increased spending on social welfare (worsening fiscal debt) due to the resulting unemployment. Increased unemployment lowers standard of living and political pressure builds.

Today, there is not one single European politician advocating extreme austerity in his or her own country. It should be noted that this is only possible because markets are beginning to ease off their demands for austerity because it has backfired on them.

The European Central Bank has just cut interest-rates again (albeit after 10 months) to boost the eurozone's economic health. At a recent press conference, European Central Bank President Mario Draghi said "weak economic sentiment has extended into the spring of this year (2013)… the cut in interest rates should contribute to support the recovery late in the year... monetary policy status will remain accommodate for as long as needed." Germany, France, Italy and Spain, the four largest eurozone members, all show signs of economic contraction this spring. Draghi repeated his assertion that he is "ready to act if needed" should the eurozone recovery stall.

Has extreme austerity had its day in Europe? In all probability, yes, as the markets are now ready for reinvigorated growth, optimism and exuberance … or at least until the next European crisis or bailout.


Categories: US News Blog