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Europe rethinks austerity

Leaders begin to realize the approach is crippling nations.

June 15, 2013|Henry Chu
  • Bags of free produce are handed out by striking street vendors in Athens. Since the European debt crisis erupted in 2009, countries from Ireland to Greece have focused almost exclusively on slashing budget deficits and debt as the road back to economic health, but the approach hasn't brought the results officials hoped for.
Bags of free produce are handed out by striking street vendors in Athens.… (Kostas Tsironis, Bloomberg )

LONDON — After years of unrelenting austerity, Europe seems to have turned a corner on its debt crisis -- right into a dead-end street.

Since the turmoil erupted in 2009, countries from Ireland to Greece have focused almost exclusively on slashing budget deficits and debt as the road back to economic health. Prodded by Germany and its insistence on fiscal virtue, governments elsewhere have fired workers, chopped welfare benefits and shelved big-ticket projects, turning the continent into what some call one giant "Austerity-land."

But officials are discovering something many people know already: Crash diets seldom work, and often make things worse.

The punishing spending cuts have stifled consumer demand and economic growth, not spurred it. The 17 nations that share the euro are now stuck in their longest collective recession since the currency's creation more than a decade ago. As their economies shrink, countries have seen their debt ratios climb, not fall -- the exact opposite of what Eurozone officials said would happen.

And in countries such as Spain and Greece, where a majority of young people are out of work and increasingly out of hope, the prospect of a lost generation looms uncomfortably large. New statistics released late last month showed that the unemployment rate across the Eurozone hit a record in April of 12.2%, or about 19.4 million people.

"Having austerity be the main focus across Europe has been a mistake," said Megan Greene, chief economist at Maverick Intelligence, a London-based consultancy. "There needs to be a wholesale different approach to this crisis."

Public patience with continued belt-tightening is wearing thin as misery increases and as officials repeatedly push their predictions of economic recovery further into the future. Street protests are commonplace, including one in late May by hundreds of demonstrators who blocked roads leading to the headquarters of the European Central Bank in Frankfurt, Germany.

The pressure may finally be starting to tell. Recently there have been signs that the region's leaders, most notably in Berlin and at European Union headquarters in Brussels, are rethinking their dogmatic pursuit of spending cutbacks and balanced budgets.

"While I think this policy is fundamentally right, I think it has reached its limits," Jose Manuel Barroso, president of the European Commission, said in April. "We cannot apply a one-size-fits-all program to the European countries."

Economists, U.S. officials and the International Monetary Fund have all been making that same argument for months, urging the EU to lighten up on austerity, or at least temper it with an emphasis on growth, especially in the worst-hit countries.

Last week, the International Monetary Fund released a report saying Greece's first multibillion-dollar bailout in 2010, which the agency signed off on, was flawed. Among the mistakes were an overly optimistic assessment that Greece's debt burden would be sustainable and a failure to see that the country would slide into a depression as a result of excessive austerity.

Advocates of a more nuanced policy note that U.S. economic performance has easily outpaced Europe's and that Japan is witnessing a comeback. Both nations' central banks have sought to stimulate their economies by, in effect, printing money.

In Europe, by contrast, recession has begun to spread from ailing countries in the south to the sturdier economies of the north, such as the Netherlands. Even powerhouse Germany is flat-lining.

Many experts say it's long past time for more robust European nations to foster demand -- for example, by allowing wages to rise -- to offset flagging demand among their neighbors.

"What we need to see is a stimulus coming from the stronger countries and ... less austerity for the weaker countries," economist Greene said. "Right now it's just the weaker countries doing all the adjusting, ensuring that they're all going into recession, if not depression."

But that argument has received short shrift in the corridors of power, particularly in Germany.

With German taxpayers fuming over having to fund bailouts for countries they view as financially reckless, Berlin has been the driving force behind austerity, going so far as to demand that spending limits be written into EU law.

German Chancellor Angela Merkel has repeatedly insisted that there is no alternative to cost-cutting. As Europe's most powerful leader, she sets the agenda.

Critics of single-minded austerity acknowledge that overspending had become a problem in some European nations and that decisive action was necessary as markets pushed up their borrowing costs to unsustainable levels. But so many countries cutting so much so fast, they contend, has turned out to be an act of collective kneecapping that has crippled the entire region.

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