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BPR Post 1 - Rescue 2.0

1) European leaders took steps over the past few days to strengthen the eurozone rescue efforts, but these moves come with conditions requiring countries to adhere to austerity programs. 2) Austerity politics, which had been the main policy response to the financial crisis in Europe, involves huge spending cuts and tax increases to reduce massive government debt. However, austerity programs did not stimulate economic growth as intended. 3) While profligacy contributed to debt problems for some countries, others like Ireland and Spain ran budget surpluses for years prior to the crisis and their debt levels were among the lowest in the eurozone, so it is unreasonable to blame them entirely or require only austerity solutions.

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38 views2 pages

BPR Post 1 - Rescue 2.0

1) European leaders took steps over the past few days to strengthen the eurozone rescue efforts, but these moves come with conditions requiring countries to adhere to austerity programs. 2) Austerity politics, which had been the main policy response to the financial crisis in Europe, involves huge spending cuts and tax increases to reduce massive government debt. However, austerity programs did not stimulate economic growth as intended. 3) While profligacy contributed to debt problems for some countries, others like Ireland and Spain ran budget surpluses for years prior to the crisis and their debt levels were among the lowest in the eurozone, so it is unreasonable to blame them entirely or require only austerity solutions.

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mochalie23
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Rescue 2.0 : Back to austerity?

September has come and Europes politicians are finally in their offices, back
from the annual August recess. Back to the rescue. Were only half way through the
month, but so much has been done and said over the past few days. True, European
leaders still disagree over what the eurozone banking union should look like. But I
think Europe has sent out one of the strongest signals in its commitment to save the
eurozone. European Central Bank (ECB) declared that it would basically act as a
lender of last resort for failing state governments; previously, the ECBs primary
and essentially the onlymandate had been to keep inflation below 2 percent. Now
it can start doing other things, like buying short term bonds of those troubled
countries and contribute to the rescue. Six days later, the German Constitutional
Court backed the new permant eurozone bailout fund, the European Stability
Mechanism. Can we, though, really hail these movements as good news?
I am not so sure. It seems too good to be true. Look more carefully into ECB
statements; what seems to be a radical decision comes with strings attached. The
Bank will only buy short-term bonds of these countries on the strict condition that
these countries adhere to reform programs and formally request help.
It seems to me we are back to where we started off with: austerity. Simply
put, austerity politics is a way of reducing massive government debt through a mix
of huge spending cuts and tax increases. If we look back at the policies passed in the
EU with respect to the financial crisis, austerity had been the undisputed paradigm
over the past few years. The idea behind this policy prescription was that the lack of
economic activity came from uncertainties about large government debts, and that
the only way to re-instill confidence in the economy was to drastically cut the debt
burden off of government balance sheets.
Governments thus cinched their waist belts to those last inches, hoping that
attempts at debt reduction would ease market fears of a sovereign default and
stimulate economic activity. To give one drastic example, public spending was
slashed by more than 6 percent in Greece; wages and pensions fell by as much as 35
percent. Of course, austerity wasnt so voluntary in Greece. But in January, twenty-
five EU countries agreed to write a cap on future deficits into national law or into
their constitutions. Austerity economics was clearly German-inspired, but it enjoyed
a certain degree of political support in the UK, Spain, Ireland, and Italy, where new
administrations placed deficit reduction at the center of their economic strategy.
But austerity didnt seem to work. Even though huge chunks of government
budgets had been slashed, government bond yieldsa major indicator of economic
confidenceremained high. Spainish yields, for instance, hit 6 percent in April.
Austerity programs were also greatly unpopular. Former French president Nicholas
Sarkozy was the eighth leader of a eurozone country to have been swept from office
the past year.
Moreover, unconditional austerity programs blinded politicians from the real
problem. Many scholars and politicians had viewed the crisis as a problem of
Mediterranean profligacy. The Greek government lied about its financial situation
and Spanish households and firms lived above their means. The German word for
debt, Schulden, as the Economist pointed out early this year, is the plural Schuld,
meaning guilt or fault. Countries in the periphery, which also includes Portugal,
Ireland and Italy, must pay their price and immediately restore budget discipline.
But these countries are not entirely profligate. Before the crisis, the governments of
both Irelands and Spain were in constant surplus. Ireland ran budget surpluses
between 2001 and 2007 and Spain between 2005 and 2007. Unlike Germany, who
failed to meet the limits for deficit and debt set out in the Stability and Growth Pact
and evaded punishment, these countries fulfilled their obligations. Aside from the
Greeks whose debt level surpassed 100% since long, the outbreak of the crisis
preceded the accumulation of debt in many Mediterranean countries. It seems
unreasonable to criticize the Irish and the Spanish as prodigal when their level of
debt has been among the lowest of the eurozone before the crisis.
I thought Europes politicians had finally understoodthrough the pain of
losing officethat austerity cannot be the primary way out of the crisis. But they
seem to have come back to where it all started. I am not denying the importance of
debt reduction, but before going back to what involves large reforms to cut debt, I
wish Europes leaders would put a pause to the swift and courageous rescue
movement to think about how Europe got into this unfortunate mess. After all, the
single currency and the European Union was a brave new experiment of the 50s,
conceived as a means to bring about peace within the continent.

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