How Austerity Is Killing Europe

[marmar]

Published on Friday, January 20, 2012 by New York Review of Books
How Austerity Is Killing Europe

by Jeff Madrick


On the last day of 2011, a headline in The Wall Street Journal read: “Spain Misses Deficit Target, Sets Cuts.” The cruel forces of poor economic logic were at work to welcome in the new year. The European Union has become a vicious circle of burgeoning debt leading to radical austerity measures, which in turn further weaken economic conditions and result in calls for still more damaging cuts in government spending and higher taxes. The European debt crisis began with Greece, and that nation remains the European Union’s most stricken economy. But it has spread inexorably to Ireland, Portugal, Italy, and Spain, and even threatens France and possibly the UK. It need not have done so. Rarely do we get so stark an example of bad—arguably even perverse—economic thinking in action.

Over the past two years, the severe 2009 recession, which started in the US but spread across Europe, have imperiled the finances of one European country after another. As a result, Portugal, Ireland, Spain and Italy are coming under pressure from the EU to cut government spending and raise taxes to reduce their deficits if they wanted to qualify for a bailout. All have done so. Ireland and Portugal sharply cut spending and still had to take tens of billions of euros to help meet financial obligations as of course did Greece. The European Central Bank bought the bonds of Italy and Spain. Britain’s Conservative government led the way in ruthless government cutbacks in 2010. France has adopted its own austerity package, and even Germany, the supposed economic leader of Europe, has planned to cut its deficit by a record 80 billion euros in 2014.

Proponents of austerity claim that as nations take control of their finances businesses become more convinced that interest rates will not rise and that growth will resume. Their reasoning has been abetted by the financial markets, which drove up rates on Greek debt and soon enough on the debt of nations like Portugal, Spain and Italy. Should these nations not be able to pay their debts, bond buyers wanted a high enough interest rate to compensate for the risk.

But this is pre-Great Depression economics. How could the EU so misread history and treat with contempt the teachings of John Maynard Keynes, who argued that during recessions governments must expand economies through spending and tax cuts, not the opposite? In practice, making large-scale budget cuts or raising taxes, as Keynes showed, will reduce demand for goods and services just when an increase is needed. Faltering sales will undermine the confidence of businesses far more than fiscal consolidation will embolden them. By ignoring this, European policy makers will deepen, not solve, the financial crisis and millions of people will suffer needlessly. ..................(more)

The complete piece is at: http://www.commondreams.org/view/2012/01/20-3

[LeftishBrit]

1. k&r; very interesting article!

[CJCRANE]

2. K&R.

[Hawkowl]

3. Eventually, it will kill the banksters

The land of the French and Russian revolutions will not tolerate this forever.

[cbrer]

4. The Austrian Economists

Refuted Keynes. They spoke of the dead end philosophy of centralized banking. And the inevitability of collapse and poverty by following the debt circle artificially created by those institutions, governments, and citizens only too willing to accept handouts and deficit spending. They postulated that wealth was to be created in real terms, and not by "interest".

This latest (not unique by a long shot) episode of economic "adjustment", is but a hangover from which we can choose to recover. This of course, was abetted by our shill government's willingness to change regulatory environments to enable Wall St. to rape the system. And later even further down the rabbit hole, the government stole our childrens future income to allow these institutions to survive after plundering our financial systems, plus other government's, and bypass the laws created to assure the destruction of such poorly run, shortsighted institutions.

Or we could just go out drinking some more...

[bhikkhu]

5. "wealth created in real terms" is constrained by resource limits

...on a finite planet, there are limits to how much growth an economy can continue, and even the ultimate size it can sustain. Typically, economists look at the last few centuries of growth and ignore resource constraints entirely, as if "price" alone magically fixes all things.

That works fine, until it doesn't. I am prone to think that economic growth is currently constrained everywhere not because of some ideological flaw, or some economic conspiracy, or some sleight of hand we need to apply to the numbers, but simply because we as a species are nearing the carrying capacity of the planet.

Resources have real limits, which become economic limits. I would consider the possibility that in Europe they have looked at things realistically, and chosen the most painless way to adapt to a future of limited growth.

[provis99]

6. those clowns did not "refute" Keynes.

Austrian economics is composed of fact free libertarian fairy tales best left to the Heritage Foundation.

And don't get me started on the monsters at the University of Chicago...

[cbrer]

7. Cool

We've established that "Economics" is, at best, a guessing game based on past events, human behavior, and some clever trend analysis.

Hold on, let me go get my crystal ball! Just as reliable...

[fasttense]

8. Austerity is just another word for trickle down, voodoo economics.

In Europe, some crooked politicians get with some psychopathic banksters and buy crap that is marked as gold. Then the label is peeled off and every one sees it's crap. Instead of saying these are not real debts; instead of saying these are illegal debts because the politicians were crooked and the debt was nothing but a con; instead of even negotiating down to the price (like Trump and the Waltons do) of the real value of the crap, they say oh we have to pay every last cent of the con to these very, very rich men. Then they take it from the 99% of people who had nothing to do with it.

They borrow from another bunch of psychopathic banksters to pay off, every last cent, of the con, I mean debt. The 2nd set of psychopathic banksters demand that all the people who weren't in on the initial con have to pay off the debt and they better seriously suffer while they are doing it. And now that everyone in the country is busily paying off 2 sets of cons, I mean debts, and the entire country's wealth is going to a bunch of psychopaths, the country's economy spirals into crap, never to see the light of day for centuries.

In the US, a group of psychopaths go around saying oh, my, my we have a debt too. States who were conned, into buying crap sold as gold, are busily paying off their fake debt too. But the federal government never bought the con and has a minor debt caused by 2 or 3 wars, tax give away to the super rich and a serious economic crash. But instead of ending ALL the wars, making the super rich pay the same as the working people or even trying to improve the economy, they says we must cut heating oil for the elderly, we must cut food for the starving, we must make the poor unworthy and take from them some more.

All the while the super rich are enjoying themselves, thinking that their stolen loot will protect them from the hordes of starving masses of people. And some poor and working class people still buy into the con and think that taking from the poor and working people is the only way to run an economy and in another world that would be called crazy. But in this world we call it free trade, supply side, and Austrian economics. We also call them RepubliCONS and Libertarians.

[crazylikafox]

10. Most understandable summary of the situation I've read yet. k&r

[Mosaic]

9. Europe is smarter than we are

These negative articles are full of crap. I know they will work it out. Europe produced nearly all of our culture, and a great deal of technology like the car, rocket, and knowledge of science on the cutting edge. They have social systems even conservatives don't question. They are enlightened people, good people. Shame on the jealous American types that write drivel like this.

[marmar]

11. "Shame on the jealous American types that write drivel like this."

Umm, the articles coming from Europe are even more dire. Their media tends to be much more reality-based than ours.