The European countries are facing lower growth rates, just as they faced in history. The austerity measures have brought pain to the euro zone, and these measures provided no relief. The euro zone countries are reducing their spending by the double digits. Such reduction is increasing unemployment in Europe. The eurozone countries are trying to find the possible ways that are suitable for countries that are stagnant economically for the prosperity of the countries. In order to achieve the better growth for the economies, the countries are adopting austerity. Austerity is the intentional deflation of the domestic prices and wages through public spending cuts. However, it is designed in order to reduce the deficits and debts, for increasing the competitiveness of the economy and for restoring the business confidence. The advocates of the austerity are of the opinion that the reduction of spending increases private investment, because it indicates the fact that government will not crowd out the market for the investment purpose by utilizing its own stimulus, and it will also not add its debt burden.
The producers and consumers, will, however, feel confident and positive about the future, and they will prefer to spend more, ultimately increasing the growth in the economy. But, considering the recent shocks that arise because of the financial crisis that has increased the public debt, most of the eurozone is consistently adopting the austerity measures for many years. However, the results of this experiment are evident now, and they are consistently showing that austerity measures do not work. Further, since 2009, most of the economies on the eurozone periphery have been in a free fall, and in the fourth quarter of the year 2012, the entire eurozone contracted as a result of the austerity measures. The economy of Portugal contracted by 1.8%, economy of Italy shrank by about 0.9%, and Germany contracted by 0.6%. The United Kingdom, though not included in the eurozone but it also contracted and has gone through triple dip recession just because of the adoption of the austerity measures (Blyth, 2013). However, the same is being revised by the countries, they are adopting the austerity measures in order to stabilize the economic growth, but the result is that the economy is showing poor growth with the adoption of the austerity measures.
In order to help eurozone to come out the lower economic growth, the International Monetary Fund has warned them that the constant cuts in the spending of the state during the recession, across the interconnected economies, when the interest rates are already low, this will inevitably harm the economic growth prospects. Also, the warning was given that the countries embracing austerity would have more doubt in the end as compared to when they started. For example, the consequences of adoption of austerity can be analyzed from the facts that, the debt-to-GDP ratio of Portugal has increased from 62% in the year 2006 to 108% in the year 2012. The Debt-to-GDP ratio of Ireland, however, quadrupled from 24.8% in the year 2007 to about 106.4% in the year 2012. The Debt-to-GDP ratio of Greece has increased from 106% in the year 2007 to about 107% in the year 2012. The debt ratio of Latvia has climbed from 10.7% of GDP in the year 2007 to about 42% in the year 2012 (Aravosis, 2013).
Furthermore, Austerity has become as well as remained the default response to the policy in the eurozone financial crises for both the ideological as well as material reasons. This is because; materially there are other policy options that are easily available. Unlike the U.S. that has bailed out its banks in the year 2008 because it contained central bank and central treasury for accepting the desired collateral, the European Union, however, has to encourage its own declining banking system, which is three times large and twice leveraged than the banking system of the United States. The banking system of the United States has recapitalized by shedding all its debt, and now it is ready for the growth. But, the Eurozone is not able to start this process because of the adoption of the austerity measures. The result is that the eurozone economies have contracted and are still contracting.
Ideally, this is the perceptive appeal of the austerity idea i.e., not to spend above than one have as it will shed its spell. The large scale and simultaneous spending cuts just increase the problems. It can be justified from the fact that the eurozone has adopted austerity and has suffered from poor growth, now history is repeating itself as the zone has again adopted austerity that is again shrinking the economy. But, the United States has not pursued the austerity measures, and as a consequence of this its balance sheets are clean and the economy is in a position to grow. However, this is a fact that the debt of United States has increased but the growth has cured the problem of debt.
The relationship between the debt and the spending cuts can be analyzed by the idea of the balance sheet recession. The Eurozone is simultaneously shedding its private and public debts, but as a matter of fact it is not feasible for the countries to shed their public and the private debts simultaneously. The government should be involved in getting the private sector for paying downs its debts and maintaining the public spending. However, once this is done, the recovers of the private sector, the revenues of tax will rise, and the accumulated deficits and debts can be paid. However, in order to get this right timing and the composition is required. Further, if history is considered, there are eastern European countries that are taken as the role models by the austerity advocates; they are REBLL alliance-Russian, Estonia, Bulgaria, Latvia and Lituania.
In the years 2009-2012, REBLL have cut their spending more than any other country in Europe, and fast growth of these countries is noted in the year 2011 and 2012. But, as a matter of fact this is not indicative of the fact that the spending cut paves the way to the growth. This situation of growth can be justified by the fact that in the early years of the century, at the time when these states were becoming member of European Union, they have undervalued bank assets. However, the government ruling these states has recovered from the communist past and then enthusiastically embraced the capitalism. It was decided to build the economic institutions that were open to the capital flows and friendly to the foreign investment. Moreover, during the liquidity crunch of the year 2008-2009, the German, New Australian and the Swedish main banks have decided to find additional cash required by taking the money from the local branches of Eastern Europe. It indicates that the European countries have to watch powerlessly as their supply of money flew away. In 2009, an agreement was signed between the banks, the International Monetary Fund, and the European Union, Hungry, Romania, Lativa and the European Commission in Vienna for stanching the bleeding. It is proposed that the banks in the core of Europe should keep their funds in the eastern European banks only when the government of the banks of the eastern European countries is committed to the policies of the austerity measures for stabilizing the balance sheets of the local banks.
However, the Vienna agreement has prevented the spread of the liquidity crunch to the remaining REBELLs till the time austerity was applied in the region. Additionally, in 2009, in Latvia, the consumption has declined by about 32%, and the GDP also decreases by 7%. Same is the situation with Estonia where consumption and GDP both declined by about 15%. (Blyth, 2013). The double digit wage cut in the public sector has become a norm across the entire REBELLs that have resulted in havoc for the education, public health and the programs of social welfare. The bounce back is however impressive, these countries have recovered about 60-80% of their losses from contraction, but still the game does not have the worth of candle. Firstly, if the austerity objective is to reduce debt, then all the countries have failed with the exception of Estonia. Today, they have more debt than they had in the beginning. In reality, Lithuania, Latvia and Romania all have budget deficit when they adopted the austerity programs in the year 2009-2010, compared to Spain and Greece when their austerity programs were at the peak.
Secondly, it will take more years in order to regain the lost ground, and the unemployment will prevail in these states for an unpredictable future. Thirdly, these countries have not experienced any positive confidence and experience that austerity is expected to generate. The economic growth of the countries is badly affected and the countries remain deprived of achieving the economic progress. The austerity has increased the debt burden of the countries and the countries have to pay huge cost for the ill effects of the austerity. Moreover, during 1920s and 1930s, the Eurozone, United States and the United Kingdom all have tried simultaneously to cut their way towards growth. the project has not failed rather it has helped in causing World War II. The economy of the United States was considered as the weird beast in the year 1920. Unemployment has increased; prices of the agricultural products fell, but the stock market showed a boom. But, in the year 1929, the country has faced deficit burden and collapsing of the tax receipt.
Furthermore, the investors have lost their confidence and they started have invested in other countries, taken out their invested money. As a result of this the interest rate has risen that has further worsened the economic contraction. Then in the year 1931, it was decided to increase the taxes and cut the spending. But, the economy of the United States does not recover from the contraction completely. If current scenario is analyzed then it becomes evident that the United States is also still using the austerity measures in order to control the budget deficit. The austerity instead of controlling the budget deficit is increasing the debt burdens on the economy, the unemployment rate of the country is increasing and the economy is contracting.
In a nutshell, the eurozone countries have adopted the austerity measures for the consolidation and stability of the economic policy. They want to increase the growth of the country, and reduce the debt burden. But, the fact is that the austerity measures are not the accurate choice for increasing the growth and reducing the debt burden on the economy. The countries that have adopted the austerity measures in the past have experienced increased unemployment, economic contraction and debt burden, as compared to the situation when they have not adopted the austerity measures. It has reduced the wages of the workers and caused havoc for the countries. This is also true in the case of present situation. The countries adopting austerity measures have ill economic growth. An example of this fact is United States of America, which is adopting the austerity measures in order to move the economy completely out of the recession. The country has seen very poor economic growth during recession. But, the adoption of the austerity measures has not let the country to achieve the expected results, as the unemployment rate of country has increased, and the debt ratio is also increased. The Eurozone has faced several crises due to the austerity. The entire zone remained financially crushed because of these measures. The Eurozone countries are still adopting the austerity measures for sustaining the economic stability and are facing critical challenges. Hence, keeping all the above mentioned facts into consideration, it can be said that history is repeating itself with regards to European economic policy.
Aravosis, John., 2013. Federal Reserve says austerity is hurting US growth. America Blog.
http://americablog.com/2013/05/federal-reserve-says-austerity-is-hurting-growth.html (Accessed 16th April 2014)
Blyth, Mark., 2013. Austerity: The History of Dangerous Idea. Oxford University Press: New York
Blyth, Mark., 2013. The Austerity Delusion:Why a Bad Idea Won Over the West. Foreign Affairs.
http://www.foreignaffairs.com/articles/139105/mark-blyth/the-austerity-delusion (Accessed 16th April 2014)