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, Europe editor Article written by Gavin Hewitt Gavin Hewitt Europe editor

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  • rate this
    +1

    Comment number 156.

    You need austerity with investment. What does that mean, well you need to cut non-investment spending like benifits, government pay spending... But invest heavly in things like schools and infrastructure which not only generate primary employment building them but seconday and tertiary employment in the local economy.

  • rate this
    +2

    Comment number 155.

    At times like this, when banks are awash with cheap, government-mandated credit, where are those union leaders who will buy up ailing businesses and show the rest of the country how it's done?

    You'd have thought now would be the perfect time for 'the workers' to pick up 'the means of production' for a song.

    Come on Bob Crow, Len McCluskey et al. Show the world where it's been going wrong.

  • rate this
    -1

    Comment number 154.

    Rock and a hard place.

    Where do people think growth will come from in Europe without ever more debt?

    Or you can stick with austerity and watch the system implode because capitalism (especially the financial sector) doesn't work without growth folks.

    As already stated, Osbourne is a dead man walking.

  • rate this
    0

    Comment number 153.

    This is nonsense. Austerity is only partly a policy in Europe. The main manifestation of it is structural. It dosn't matter if Berlin or Brussels says that from now on Greece and Spain can spend what they like. Nobody will lend them the money and they can't print it. In the end such countries will give up on the status quo and cut ahead of the curve - More austerity not less.

  • rate this
    -3

    Comment number 152.

    We have been working at low-paid jobs in recession, but we evolve. We (scientists, engineers, inventors) understand businesses more than those pure-blood businessmen. Our economy needs evolution, not regression ‘Positive thinking’, ‘creativity’; out of the box thinking', forward thinking' are the directions to inspire our citizens.

  • rate this
    -1

    Comment number 151.

    Obviously, those European politicians have no clue of how economy and businesses run. Well, instead of jumping to-an-fro of austerity, what they need to do is being scientific and proposing a logical plan.It is a matter of creating dynamic business environments. I hope that George Osborne can work with us (scientists, engineers and inventors).

  • rate this
    -2

    Comment number 150.

    magmongoose @148
    "forewarned"
    Yes, by millennia…

    But not yet forearmed, still falling to ignorance, misadventure and wrong-doing, in every sector, scandal after scandal, the underlying message not allowed to be spoken, or distracted from @Dmr149

    Remedy lies in open culture, at every level, free exchange, possible ONLY with enduring income equality

    Call it real democracy!

  • rate this
    +5

    Comment number 149.

    Bottom line, Barrosso etc, have woken up to the fact the average Southern citizen is starting to question their beloved empire.
    Until sovereignty has been completely destroyed in each country, Merkel was talking about the EU having the ultimate say yesterday, they have to pretend to care.
    Hence the apparent turnaround,

  • rate this
    +1

    Comment number 148.

    This is indeed the bread and butter question, can economists provide useful frameworks for government decisions or do they too ride on fashionable waves of delusion? The results of getting it mainly wrong can be devastating. But does anyone ever draw any conclusions or does the issue sink into a sea of waffle? Are we forewarned and forarmed or is it a cert we'll get it all wrong again next time?

  • rate this
    -1

    Comment number 147.

    bally@146
    Not just 'fiscal'

    Need fine control of aggregate demand, sensible restriction, NOT radical. Radical restriction of imports destroys economies of potential export customers. For the real economy everywhere, TIME is needed, for physical restructuring & efficient associated labour reallocation

    Elites have saddled peoples with unfair debt & credit

    Need forgiveness & inflation, in context

  • rate this
    0

    Comment number 146.

    I don't see much of a political constituency for getting rid of fiscal consolidation.

    All these statements by european-level figures need to be seen in the context that ... they're not the ones paying out the money. It's the national parliaments that ratify that.

    The "bargain" for Merkel is the same as it ever was. You want more money? Then give ground on giving more power to the european level.

  • rate this
    0

    Comment number 145.

    Big Government, Big Business, Little Academia?
    Blame is now being allocated for the Austerity scam.

    Truth is: asymmetry of impact, in UNEQUAL societies, has devastated lives & communities & economies. Given rationing of income (so effectively of aggregate demand & import consumption), deficit countries could have attended more to export-led recovery.

    Blame: 'NOT in it together' irresponsibility

  • rate this
    +2

    Comment number 144.

    141.c_cat The reality is the Chinese are simply regaining their historical position as one of the world's preeminent economies.
    --
    Don't overestimate the Chinese economy. They are building skyscrapers and entire cities with no-one filling them and it is an economy that has been described as "Spain on drugs". They also have another ticking time bomb, their own population through the 1 child policy.

  • rate this
    +11

    Comment number 143.

    Incompetence and inefficiency of government and civil service are a major problem Read the minutes of the Commons Public Accounts committee and see hundreds of billions of total waste this last 20 years on IT, military equipment and many admin projects, many that were just scrapped. Imagine the reduction in UK debt if these had never been started!
    Government is too big and poor value for money

  • rate this
    +1

    Comment number 142.

    Like Communism, Capitalism is always run by those greedy for money and/or power. If you hack off enough people a society will change, either through revolution, unrest or the ballot box right/left will be rotated. With growing inequalities people feel hard done by. Any ‘Powers that be’ must always be juggling or they will be deposed. Austerity is a dangerous tool, as seldom seen as fair.

  • rate this
    -2

    Comment number 141.

    Alot of wishful thinking amongst the comments regarding the state of the Chinese economy. These (presumably) US commentators pray China is heading for a great fall. The reality is the Chinese are simply regaining their historical position as one of the world's preeminent economies.The Chinese are also fortunate to have engineers in positions of authority as compared to the spivs who run the West.

  • rate this
    +1

    Comment number 140.

    "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?"

    It has taken place because the malfunctioning mind of Merkel and others like her see it as the only way of preserving the Euro and beyond that of preserving the "EU".

    But neither the "EU" or the Euro are worth preserving although

  • rate this
    +5

    Comment number 139.

    The President of the European Commission, Jose Manuel Barroso...implied that a policy can only be pursued if it has "a minimum of political and social support".

    EUp: He should understand that that applies to British membership of the "EU". He should also understand that people will rise up against an unjust regime.

  • rate this
    +2

    Comment number 138.

    The US is becoming an energy exporter, 15 years ago this was unthinkable. The vast open spaces of North America make renewables like Wind and Solar profitable, with wind being the fastest growing form of energy even with all the new discoveries of available natural gas and untapped oil. Factories that once moved to china are moving back, automation replacing cheap labor.

  • rate this
    0

    Comment number 137.

    136"The Chinese...economy is headed for a major correction"

    I agree and it will be a major shock to them and the rest of the world when it occurs. This happens all the time. It happened to Japan, now it's happening to Europe. There are macro economic changes working strongly against China and in favor of the US. Energy costs and demographics are just two of them.

 

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