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 176.

    173. Jaw dropping truth

    -- and foaming at the mouth --Rabies ?

  • rate this

    Comment number 175.

    As a businessman that has survived 5 years of austerity policies in Ireland it is a bitter sweet moment to see Ollie R & Manuel B now announce that the austerity policy pursued over that time is now at an end. Our economy here has been battered by these unelected mandarins in Europe.

  • rate this

    Comment number 174.

    You dont have to be an American economics student to see that austerity is not just not working (.25% reduction in our deficit) but is also counter-productive and is inflicting long term harm on our productive capacity and productivity.

  • rate this

    Comment number 173.

    Just to be clear. and maybe enlighten..

    Barroso.. Ex Mao Communist Rabid Socialist
    Van Rumpy Pumpy Belgian Rabid Socialist
    Martin Schultz Ex East German Communist
    Guy Verhofstadt Another Rabid Left Wing Belgian Socialist
    Kathy Ashton. Total Socialist Blair Puppet ! Clueless but married well.
    Kinnock Kinnock's Rabid Socialist's but huge gravy-train/ trough turn their values. the list goes on

  • rate this

    Comment number 172.

    The fundamental ideology to grow economy is to spend less money/resources on those people whose skill-sets are replaceable, and put maximum resources on irreplaceable people in our society, such as patent-owner inventors. There is no point to repeat the same mistakes on different businesses for the sake of favoritism.

  • rate this

    Comment number 171.

    #169 Justin150

    "Neither of which are politicial acceptable in EU" ????

    -- What the heck do you think is the reason that poor countries want membership and remain in the EU ?

    --Never saw Spanish, Portuguese and Greek farmers before the Common Market and EU ?

    --this is poverty ?

  • rate this

    Comment number 170.

    And that is what happens when people delude themselves that economics is a science and economists are smart people who know what they are doing. And when none questions that those same economists and financiers brought the problem they are pretending to solve. And when none questions why all those "crises" made those same financiers even wealthier, and why the solution is to give them more money.

  • rate this

    Comment number 169.

    All currency unions end up with parts of the union becoming poor, sometimes temporarily more often permanently.

    This can only be solved by large scale movement of labour AND large scale fiscal transfers from rich to poor.

    Neither of which are politicial acceptable in EU

  • rate this

    Comment number 168.

    Nothing quite focuses the mind on living within ones means --than unemployment. Even with generous social benefits, a decrease in disposable income occurs.

    Massive extra debt with no restrictive spending on what one cannot afford -- is only again letting the roulette wheel spin after losing your shirt the first time.

    Governments and societies (and Mr Hewitt) who advocate this are irresponsible

  • rate this

    Comment number 167.

    It seem that there are still a lot of Slack-Jawed Socialist out there who have not worked out what is going on. ! Read Austerity=Death Nail of Socialist Dream.. What is going on is the rebalance the Debt is the just what the Govnt has to borrow to keep the Welfare state alive.. Many Idle backsides will feel the boot of Austerity but this is unavoidable its has been a long time coming but its here.

  • rate this

    Comment number 166.

    The trouble is the likes of Rehn and Barrosa don't get it. They need simple arithmetic lessons to learn that if you get one euro in you can't spend two euros out. Better the lessons than ending up in a bunker or on pikestaff.

  • rate this

    Comment number 165.

    Would certainly agree that without transfers, not loans, from the high productivity nations to the rest, it's hard to see how the euro system can work. But isn't that ultimately the price for ever closer union too?
    Understandably the future donors want to see the recipients picked clean and other creditors take the debt write offs before hitting their own electors/taxpayers .

  • rate this

    Comment number 164.

    You can do what you want with Macro policies, but it is the Micro policies in each country that matter. Here in Spain for example, the bureaucracy and high costs of starting a small business prevents growth. Until we have more flexibility, recovery will remain elusive.

  • rate this

    Comment number 163.

    "The IMF is not alone in acknowledging it underestimated the impact of spending cuts on growth."
    No surprise there then. Has the IMF ever got it right? Answers please on a postage stamp. The politicians fiddle on and dream. The investors though will still remain the sting in the tail.

  • rate this

    Comment number 162.

    First the debts are not fungable a £2mm debt @2% is not the same as a £2mm debt @5%.
    Also The vast majority of the debt isn't owed by countries. It's owned by private institutions like banks, hedge funds and pension funds.

  • rate this

    Comment number 161.

    You can't have continued global growth. Asia grows, Africa grows, Latin America grows, the Americas & Austral Asia remain stable, thus it's uncompetitve Europe that sees it's economies shrink. As some economies expand, so others must contract.
    This is what Europe dreamed of in the 80s, so "be careful what you wish for".

  • rate this

    Comment number 160.

    Is this the case of buy what you can with what money you have and DO NOT go into debt??

    Why not ALL the political Leaders sit down and say - you owe our country x and we owe you y lets cancel our debt and reduce yours and do this for ALL countries all over the world??

    IF the UK owes Germany 13Bn and Germany owe the UK 15Bn then cancel each others debt, Germany owe the UK 2Bn simples

  • rate this

    Comment number 159.

    154.HongKonger - " can stick with austerity and watch the system implode because capitalism (especially the financial sector) doesn't work without growth......"

    True enough - the elehant in the room is that perpetual growth of the huge annual % demanded by the "markets" within laisse faire capitlism does not work without ever increasing debt..

    ..something has to give...

  • rate this

    Comment number 158.

    AT last, the bureaucrats hace spoekn up & said what has been obvious to everyone but the average German voter since the crisis began.....

    ....the only eay to save the Euro is to transfer money from those who do well out of the single currancy to those who suffer under it...

    ...that is from Germany to just about everyone else - without the Euro German's economy would sink without trace....

  • rate this

    Comment number 157.

    Yes IF 'out of frying pan, into fire'!

    But with 'acquired doubt' as to wisdom of 'waiting to be cooked', focus on vulnerability to being mis-led, allow ourselves to think for ourselves, for ALL of 'ourselves': honest equal partnership

    Pay every citizen same, working-as-able, free to compete 'to be our best'. Capital investment then allocated by real (equal) representatives


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