Europe: Austerity fails

Finland, Slovenia, Slovakia, Greece, Italy, Spain, Ireland, Portugal, Romania, the Netherlands and probably soon also France – this is the Guardian’s long list of the European countries whose governments resigned or weren’t re-elected during the past 14 months (!) due to their failed austerity politics.

So, what remains from Europe’s two-year long try to calm the financial markets and gain control of the economic crisis by the means of rigid spending cuts and a whole bunch of short-term emergency solutions?

First of all the rapid end of the economic recovery and a political system and society that are at the mercy of financial markets that continue to go nuts. Moreover, deep cuts in one of this continent’s greatest accomplishments, the European welfare state.

But the biggest victim of this development is a generation of young Europeans who live in insecurity due to mass unemployment, increasing poverty, a massive debt burden and half-hearted political responses to the economic, financial and environmental crises. Unfortunately, it is no wonder that their trust in politics and public institutions has reached a new low-point.

It was clear for many economists and other people that Europe won’t save its way out of this crisis. The failure of Europe’s economic strategy manifests itself especially in Spain, a role model for Europe’s failed austerity approach. Two Nobel-prize winning economists make a point on this: While Paul Krugman recently wrote an interesting blogpost about the Spanish misery (“Insane in Spain“), Joseph Stiglitz warned during his visit in Vienna that Europe is on its way to economic suicide.

“There has never been any successful austerity program in any large country. The European approach definitely is the least promising. I think Europe is headed to a suicide. The problem is that with the euro, you’ve separated out the government from the central bank and the printing presses and you’ve created a big problem.

Austerity combined with the constraints of the euro are a lethal combination. The austerity approach will lead to high levels of unemployment that will be politically unacceptable and will make deficits get worse. What you are doing is destroying the human capital, you are creating alienated young people.” (Joseph Stiglitz)

Paul Krugman (New York Times) and Martin Wolf (Financial Times) also tried to quantify the economic consequences of Europe’s austerity policy. Despite using different approaches for exploring this question, both have basically performed regression analyses of the euro area countries’ GDP changes against the size of their fiscal tightening. The results of their analyses not surprisingly confirm the wrong way that the European economic policy has taken.

According to Wolf there are no signs that the spending cuts have any positive effects on overall business confidence and economic growth that would mitigate the direct, negative effects on economic growth. In contrast, it is shown that small cuts led to recessions and large cuts led the economic depressions.

Similarly, Krugman showed that every Euro saved due to austerity measures only translates into a 0.4 Euro lower deficit. So, it becomes clear that Europe can’t save its way out of the crisis but instead has deepened its crisis due to the enormous spending cuts. While those spending cuts only resulted in low deficit reductions and didn’t calm the financial markets, they increased unemployment and other social problems among the European population.

Europe’s austerity approach has failed. It is time to head into a different direction, to hold the people who have caused this crisis accountable and to fuel the economy with investments and green growth. In this regard, it will be important not only to look at the Maastricht criteria and other economic indicators but also to address the growing social imbalances and ecological problems!

Posted on April 28, 2012 in Democracy

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About the Author

Andreas Lindinger is a Vienna-based business consultant, sustainability expert and urban thinker passionate about livable cities, sustainable transportation, renewable energy and civic engagement. Andreas offers a transdisciplinary business, finance and sustainability background, industry expertise in energy, mobility and environmental consulting and broad international experience gained in Vienna, Vancouver, Berlin and Dublin. Make sure to also check out Vienncouver.com and to follow @lindinger on Twitter.

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