Europe: Retreat from austerity

European Union Commissioner for Economic and Monetary Affairs Olli Rehn (L) and European Union Commission President Jose Manuel Barroso Both Olli Rehn and Jose Manuel Barroso at the EU Commission have expressed doubts over the future of austerity

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Like the arrival of a new season, all the signs are that Europe is in retreat from austerity.

The retreat is disguised, but cannot be concealed. The President of the European Commission, Jose Manuel Barroso, said: "While I think 'austerity' is fundamentally right, I think it has reached its limit." He implied that a policy can only be pursued if it has "a minimum of political and social support".

There is not a general recanting yet, but the explanations are flying thick and fast as to why the policy that Europe has embraced for the past three years must change.

Start Quote

Austerity is neither effective nor socially viable”

End Quote Hannes Swoboda Leader of Socialists and Democrats in European Parliament

The EU's Economics Commissioner, Olli Rehn, said: "A period of reduced spending and borrowing was necessary to calm markets concerned about out-of-control debt levels, particularly in peripheral European countries. That time has passed."

The policy of austerity first - authored in Berlin - never had a consensus behind it, but it now lies widely discredited. The French government does not believe in it. President Francois Hollande said only recently that "sticking with austerity would condemn Europe not just to recession but an explosion".

Only last week, in an editorial, the New York Times said: "All evidence shows that this bitter medicine is killing the patient."

Some of the critics of the austerity first policy are in full cry. Hannes Swoboda, president of the Socialists and Democrats (S&D) group in the European Parliament, said that "five years into the crisis, Commission President Barroso has finally recognised the reality: austerity is neither effective nor socially viable".

Serious doubts

Many German officials insist, with some evidence, that reducing deficits and spending has been key to calming the crisis and preventing the break-up of the eurozone.

Even so, in an effort to reduce deficits and make southern Europe more competitive, countries have been reducing demand, even at a time of recession.

The result is what the Greek prime minister acknowledged was "Europe's Great Depression". Greece has seen its economy shrink by 25% in five years. Spain's recession is three times deeper than forecast. The IMF predicts its economy will shrink 1.6% this year. Its general unemployment level is at 27%.

Kenneth Rogoff Research by Harvard professor Kenneth Rogoff has been used as a rationale for austerity measures

As the New York Times pointed out, Portugal cut its fiscal deficit by a third between 2010 and 2012 and saw unemployment rise to 18%. Across Portugal, the Republic of Ireland, Greece, Italy, Spain and Cyprus the best educated are on the move, seeking work beyond their own countries.

The policy is partly changing because its intellectual underpinning has been challenged.

Two economists - Carmen Reinhart and Kenneth Rogoff - were two of the gurus behind European austerity. Their basic thesis was that when debt rose above 90% of GDP, growth would decline sharply. Olli Rehn, for one, spoke of "the 90% rule".

Now there are serious doubts about the accuracy of that thesis. It is also being asked why European officials were determined to bring deficits below 3%. In many instances the deficit targets seemed arbitrary. The IMF is not alone in acknowledging it underestimated the impact of spending cuts on growth.

So the austerity believers are in retreat. Ireland and Portugal have been granted seven more years to meet their targets. Spain is likely to miss its target for reducing its deficit. Indeed, it had the biggest public deficit in the EU last year. Increasingly it looks as if it will get more time. Perhaps two more years. Suddenly targets are being eased and relaxed.

For what Europe's leaders and officials fear more now is unemployment, recession, and growing disillusionment with the eurozone that seems unable to deliver. Reducing debt is no longer the priority.

But the question remains - could the devastation of the economies of southern Europe have been avoided, or has that been the price of preserving the eurozone?

Gavin Hewitt Article written by Gavin Hewitt Gavin Hewitt Europe editor

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  • rate this

    Comment number 36.

    Deferring targets won't solve the basic problem of the euro straitjacket.
    Still, it keeps the strugglers as a place for cheap holidays and cheap property while they're picked clean. Little chance of any of these states attaining productivity levels comparable with the north, so no escape.
    Will France will accept this position as easily too?

  • rate this

    Comment number 35.

    There is some great news from EU. When the €uro breaks up, there are fortunes to be made on currency markets. Once that sinks in, the Big € is history. Take DE, how will its currency be revalued viz a/viz the €uro. It will be an almighty killing like nothing before. German/Austrian economists do not understand monerary. They haven't got a clue.

  • rate this

    Comment number 34.

    If EU leader are now proposing an alternative to Austerity then it can only be Keynesianism i.e. the very policy that got them into trouble in the first place.

  • rate this

    Comment number 33.

    31 Ovalball

    'They came to power saying they would make things better
    They have ended up making them twice as bad'

    Yeah. Curse them for throwing away Brown's economic miracle eh?

    What was it? 180bn quid deficit in his final incompetent year destroying the UK? For what? 0.1% 'growth'. 11% of GDP to generate 0.1% 'growth'?

    What a genius. Mugabenomics at its finest.

  • rate this

    Comment number 32.

    For me, what you must do during difficult times is what you must do in good times. Spend efficiently and don't waste...whether in tough times or good this is what you should always do. All this talk about austerity or spending your way out of recession is total rubbish...keep investing properly and stop wasting money...I guess public servants from top to bottom fail to get this.

  • rate this

    Comment number 31.

    The chancellor has added more onto the Debt than any other chancellor in our entire history £400 billion and counting
    He himself forecasts that he will have doubled our Debt by 2016-17
    They came to power saying they would make things better
    They have ended up making them twice as bad
    Oh yea and cut every public service

  • rate this

    Comment number 30.

    Here is how grown ups sort out sovereign debt but of course the EU Central Bank is a basket case and Germany is $2 trillion in debt. Yes $2trillion.

    Government debt is not the problem, it only worries silly people which is how 'This time is different' gained traction.

    Govt. debt problems stem from servicing their debt, it's about interest rates.

  • rate this

    Comment number 29.

    This notion that governments can just keep on spending money they don't have (and I'm including the US in this) is just insane. When are we going to realize that economies - especially credit-based, consumerist ones - cannot grow indefinitely or even be sustained indefinitely?

  • rate this

    Comment number 28.

    Hugo Grotius @19
    "living within your means"
    Of course

    But do you not still 'miss the point'? Any 'necessary austerity' has to be SHARED, so that confidence is maintained - for demand and production - within whatever means we judge prudent, 'in it together'?

    Twice failing, in 2008 and in 2010, to declare Emergency Rationing of Income, just the threat of asymmetric austerity was enough to ruin

  • rate this

    Comment number 27.

    Virtually every school of Economic thought sees activity as cyclic, with a slight upwards growth.

    All Governments can do is try to smooth out the curve a bit.

    My own view is Austerity has made things "worse", for most of us.

    I have no doubt though it has helped calm nerves, and the value of that should not be underestimated.

  • rate this

    Comment number 26.

    25 Ovalball

    'It went down 0.3 of a % at that rate it’s going to take 400 years'

    Indeed. The Tories need to cut faster and deeper. 25% salary cuts for public sector workers would fix it at a stroke. They (the public sector) had a decade on the pigs back of borrowed money. Time to wind their neck in and live within our means.

  • rate this

    Comment number 25.

    It’s nice to see a subjective view from the BBC on austerity in Europe
    Why can’t they show that here
    We had a clear indicator today that austerity is not working here with the borrowing figures
    But what do the BBC do they said the Chancellor can claim he’s on track because the figure went down from last year
    It went down 0.3 of a % at that rate it’s going to take 400 years

  • rate this

    Comment number 24.

    Austerity is often is often term an economic plan that stands in the way of growth, but it can work and provide growth by building a smarter economy. If one cuts waste and re-navigates the money towards encouraging small business/ immigration/ job creation, the economy will still grow. Fueling growth with rising debts is unsustainable and reckless.

  • rate this

    Comment number 23.

    "devastation of southern Europe
    pointless" Sadly not quite
    Much is asked of citizens in war - and much might sensibly be asked in peace-time - but not idleness and social exclusion, the while to see supposed leaders helplessly if not shamelessly feathering their nests, the tree of state eventually to topple. No such 'academic error' would have been allowed to dictate in Equal Partnership

  • rate this

    Comment number 22.

    3. Daiham

    'You cannot cut your way out of a recession'.

    You wouldn't have thought it was possible to spend your way into one either but Labour managed it. So all that counter-cyclical spending that governments are supposed to use at times like this has got completely out of sync and now there's no money left.

    It just showcases Labour's utter incompetence. Yet again.

  • rate this

    Comment number 21.

    Europe still hasn't faced reality.IMF either gets it dead wrong or sugar coats the truth.What's truth?The European welfare state isn't competitive in a global market.Others just as smart and work just as hard are paid far less, get far fewer social benefits.Protectionism will kill its exports through reciprocation.Lack of it makes its product too expensive even at home.And then there's regulations

  • rate this

    Comment number 20.

    13. forwarnedthinking ~ The thinking for very odd reasons is that lenders wag soveriegns. Well, that becomes a very interesting proposition once tax avoidance is addressed and the EU sorts out the ECB. If say, Germany went t/u then what would its creditors be able to do? Nuke it?

    The trouble will hit on a very broad front when interest rates increase, which they will. Invest in China? :)

  • rate this

    Comment number 19.

    Replace the term "austerity" with "living within your means" and it will be obvious to everyone that it is the absolutely right thing to do, and yes, having manageable debts / interest payments is still living within your means.

  • rate this

    Comment number 18.

    "All evidence shows that this bitter medicine is killing the patient."
    Or poison was put in the medicine to give the banks enough time to pay off their fines and re-balance their dodgy books after the many misdeeds they had been doing for the last umpteen years

  • rate this

    Comment number 17.

    A 15% collapse in the 1st Qyrs EU car sales is the final wakeup call to Europes nightmare, regardless of its politics and stupidity. The 25% demolition of Greek HDP. Was the GDP buying porshrs, Audi's and VW's.

    Orders to German car makers down 13% on the quarter. Just wait will you, please. Our election is in September.


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