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On a shoe-string budget :- Austerity measures in Europe

The Second World War left Europe deeply divided and fragmented. The economies of European countries were in tatters, and debts had skyrocketed. The once proud European powers were thrown to the ground, exhausted and defeated. This was the time when Europe embarked on a course which would guarantee peace for the next four decades. The once inconceivable idea of a united Europe began to take shape in the 1980s, with the formation of the European Union. European integration was seen as an antidote to the extreme nationalism which had devastated the continent.

The European Union has been instrumental in raising the standard of living of its people. GDP growth rates touched as high as 6.5% in 2004, and incomes soared. This led to increased government spending on infrastructure, social security, and welfare. Countries found it very easy to secure loans from international financial institutions due to the incredible credibility of the European Union. As a result, relatively underdeveloped countries in Eastern and Southern Europe began to splurge on welfare schemes. Consequently national debts soared, unchecked….

In 2010, Governments were jerked out of this Golden Period when Europe faced the worst financial debt crisis in decades. Several euro zone member states (Greece, Portugal, Ireland, Spain, and Cyprus) were unable to repay or refinance their government debt or bail our over-indebted banks under national supervision without the assistance of third parties like the International Monetary Fund (IMF).  Since the financial crisis, various governments and global financial institutions have been obsessed with reducing national debt levels. It has been over 5 years since Europe has been following a path of Austerity, and now is the time to take a brief stop and inspect : Have austerity measures brought more benefits than losses or vice-versa?

Long-term interest rates in eurozone
European interest rates. (Notice the sharp jump in Greece’s interest rates)

Before we move forward, we need to ditch the preconceived notion that debt is always bad. Debt has value and that during recessionary times, countercyclical measures which may raise debt are needed to stimulate growth, GDP, employment and stabilize the economy. Austerity is a sort of punishment for spending beyond one’s means. While reducing wasteful spending is beneficial for the recovery, austere measures that widen unemployment and shred cohesion are inimical for it.

In the wake of the financial crisis, austerity was pushed forward out of fear of the implications of soaring debt levels. In part, austerity was championed on the premise that it would restore the fiscal credibility of financially shaken countries and combat the rise of interest rates, which normally accompany growing debt levels. Rising interest rates have always been a headache, especially during times of recession, since high interest rates tend to restrict credit flow to businesses and consumers and thus slow economic activity. The only way governments could respond was to drastically cut down government spending, in order to curb the national debt.

This crude approach to spending cuts has weakened economies by increasing unemployment, destroying human capital, and prompting an exodus of talent. Countries under austere prescriptions, such as Spain and Greece, are facing youth unemployment levels close to 50 percent . And if that were not bad enough, such high unemployment is deleterious for future growth since it destroys human capital and encourages a brain drain. In Greece, for example, more than 100,000 workers have already left in search of greater economic opportunity elsewhere. The resulting unemployment from austerity and the associated skill loss, or in the case of young people, prevention of skill development, has and will severely impact immediate and future economic productivity.

Austerity measures have also torn apart the rich social fabric of the austerity prescribed countries. Social well-being is closely related to employment ; in fact, joblessness was found to have the single greatest negative impact  on a person’s well-being. Shredding employment undermines this social fabric; it is no wonder massive protests and riots have erupted in countries like Greece.

Image result for austerity eu
Anti-Austerity march in Athens, Greece

The severe impact of leaving millions unemployed as government programs and businesses shudder under the effects spending cuts is not a policy that is tolerable, at least for long. Recently, the IMF, a major proponent of austerity, conceded that it “badly underestimated the damage that austerity would do to Greece’s economy.”

Thus, in my opinion austerity imposed in Europe has been a massive failure, leaving millions of people unemployed. Austerity has lost the popular support and gusto it enjoyed a few years ago as people realize that productive spending, which may increase deficits and overall debt, is not to be abhorred, for in fact the recovery and future growth depends on it.

Note:- All the opinions stated in the above article are the author’s own.

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