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 76.

    @72 remem... The profit figures for the banks have also been obscene. How do you publish x billion profits considering the size of the write-downs in these companies?

    Western countries have been living beyond their means. But, the markets are responsible for most of the carnage.

  • rate this

    Comment number 75.

    " could the devastation of the economies of southern Europe have been avoided,"

    --YES !

    -PAY TAXES !

    Greek tax offices closed as employees stage protest´

    "workers are demanding that no one is fired from key posts at tax offices and that employees.. see their salaries restored to pre-memorandum levels.

  • rate this

    Comment number 74.

    jgm2 @69
    "Blame Brown"
    However we got into this mess, 'the engine' is stuck. Without the 'lubrication' that is currency, for ALL moving parts, we will at best make kangaroo-progress, taking-on more harm, domestic social disorder avoided only in war of some kind, hot conscription or cold clamp-down. We need to liberate and share 'the money'!

    Emegency Income Rationing - for ALL - was needed in 2008

  • rate this

    Comment number 73.

    66 rememberdurruti

    'I think you will find that the NHS frontline staff have been on a 3 year pay freeze followed by a 1% 'pay rise'. During those 3 years inflation @ gas 38%, electric 29%, petrol 18%, transport 24% etc...'

    In 2007/8 just about every person in the UK had their mortgage slashed by 75%. That was the day to be also freezing/cutting public sector salaries. Not recruiting more.

  • rate this

    Comment number 72.

    The real reason for austerity measures...
    "Lloyd Blankfein, the head of giant investment bank Goldman Sachs, has said the UK must stick with its austerity plan or face a negative reaction from global investors. Goldman Sachs easily beat analysts' estimates for earnings and revenue in the third quarter. Net profit was $1.5bn (£931m) Revenue more than doubled, to $8.4bn from $3.6bn.

  • rate this

    Comment number 71.

    The saddest and perhaps sickest thing is that the debts held by banks and institutions actually gives these financial bodies more power over governments, which gives them no incentive to curtail their reckless banking behaviour.

    Politicians moan aboout the bankers but goverment actions just gives more power to the bankers. Who suffers - The people!

  • rate this

    Comment number 70.

    In the last 100 years of the British Empire, 4,000 civil servants ran a quarter of the planet!
    Now we have half a million civil servants.

    We should not pitch private V public but, the balance in the last 10-15 years has gone the wrong way.

  • rate this

    Comment number 69.

    65 All for All

    'Making 'public' the enemy of 'private' has already failed'

    Blame Brown for that. He had the opportunity in 2007/8 to rein in the public sector but instead he kept recruiting right through to 2010. After 3 years of being told it was 'all the bank's fault' there was no way to make them see that their massive debt-fuelled expansion in pay and headcount was also the problem.

  • rate this

    Comment number 68.

    Why has it taken an economics student uncovering the faults in the Reinhart / Rogoff theory to trigger this U turn by the EU, when the austerity being imposed was clearly not working. If the theory had remained unchallenged presumably they would still be flogging the dead horse.

  • rate this

    Comment number 67.

    Spending REDUCES debt in the long run.
    Spending creates growth.
    And growth puts revenues into the governments pocket.

    By contrast, Austerity cuts revenues and INCREASES debt.

    Only Republicans and Conservatives fail to see this.

  • rate this

    Comment number 66.


    "Failing that we could balance our budget (a bit) by freezing public sector pay instead of marching them up their pay scale every year (something they don't mention)."

    I think you will find that the NHS frontline staff have been on a 3 year pay freeze followed by a 1% 'pay rise'. During those 3 years inflation @ gas 38%, electric 29%, petrol 18%, transport 24% etc...
    See the problem now?

  • rate this

    Comment number 65.

    jgm2 @61
    'freezing public sector"

    Making 'public' the enemy of 'private' has already failed, just part of chaotic asymmetric austerity, destabilising private confidence, forcing even greater risk (including paralysis) on 'borrower & investor' of last resort, government

    So much bold talk of "25% cuts" in contract terms! If only deployed in 2008 / 2010, "ALL in it together", we would be motoring..

  • rate this

    Comment number 64.

    61 jgm2 - Don't mention the growth plan again. You may have gotten away with it, this once!

  • rate this

    Comment number 63.

    When austerity measures and living within your means are applied to the financial sector then they will work. Until then, applying them to the victims of the financial sector achieves nothing except a shrinking economy, growing unemployment and business failures. All of which costs money which we haven't got. See Greece, Portugal, Spain, Italy, Cyprus etc.. For evidence but, not Iceland.

  • rate this

    Comment number 62.

    @60 Yup, Failures and dangerous, just like fellow comment makers such as 54. Ignorant, too.

  • rate this

    Comment number 61.

    What we need to do is borrow and print more money. This will lead to 'growth' and has been proven to work by Zimbabwe, Argentina and the Weimar Republic. Some of these countries witnessed several million percent growth some years.

    Failing that we could balance our budget (a bit) by freezing public sector pay instead of marching them up their pay scale every year (something they don't mention).

  • rate this

    Comment number 60.

    The EU political pigmies suddenly begin to doubt their own wisdom. Having swallowed the austerity rubbish of Reinhart and Rogoff, Olli Rehn must have choked as he tried to justify his use of their faulty assumptions. Now all we need is the investigation into IMF boss Christine LaGarde finding a case to answer, then perhaps she will keep it shut as well.
    What a worthless bunch of failures they are!

  • rate this

    Comment number 59.

    I think it's a good thing mistakes are acknowledged sooner. The realisation that austerity has reached it's limits of influence is important.

    The sooner you realise you're mistakes the sooner progress will be made.

  • rate this

    Comment number 58.

    Wakey wakey, smell the coffee - the debts are simply too massive to ever be repaid.

  • rate this

    Comment number 57.

    Is austerity bad?
    Recent Normal retirement ages:
    Greece 55-58
    France 57-62
    Italy 57
    Belgium and Austria 60 and Spain 61

    Luxury more than austerity


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