No Time for a Holiday In Europe Continuing Austerity Cuts Deep Into Society and Families -What Lessons for Our Future?

~ “A stalling of economic growth in the second quarter of 2014 raises concerns that the Euro area is slidinginto a triple-dip recession.” ~ Chris Williamson, August 2014

~ “The priority must be exiting the crisis, and the dogmatic reduction of deficits should come after. Germany is caught in a trap of austerity that it is imposing across Europe,” ~ Manuel Valls, Prime Minister of France, August 24, 2014

On holiday in Sicily, southern Italy, I am struck how deeply five years of “austerity” policies in the Eurozone countries have cut into the economies, and into families’ lives and prosperity in all the eighteen nations of the Eurozone. August traditionally has been a holiday month when most Europeans take time off for summer vacations. In these long extended troubled times, since the 2009 Great Crash, far fewer Europeans are taking a break. Even the national governments are still hard at work. The French Government, led by Prime Minister Manuel Valls, resigned last week. Key ministers – including Finance Minister Sapin and Valls himself – could no longer support further budget cuts under the “austerity” program demanded by the European Union (EU) backed by the German Government of Chancellor Angela Merkel.
France’s unemployment rate has hit a new record – over 10.3% – and the French economy is now expected to stagnate, or even decline, in 2014. More broadly, as Markit economist Chris Williamson (above quote) notes, concerns are now widespread the entire Eurozone – including Germany – will slide into further recession. Like other Eurozone countries, France has been under pressure from the EU, the International Monetary Fund (IMF) and the Germans to cut its budget deficit to below 3% – the limit set under the European Stability Pact agreed in 2012. Much progress has been made in Eurozone economies in cutting government spending in the past three years. But it has come at a very high price in terms of prolonged recession alternating with anemic economic growth. The sheer magnitude of the 2008-09 Great Recession seems to have been fundamentally misread. So, premature cuts in government spending when demand is weak and the world economy is recovering only slowly, have sparked only continuing recession, high unemployment and actually increased government deficits and debt!
Against this, the EU and the Germans – led by Finance Minister Wolfgang Schauble and German central bank (Bundesbank) chief Jens Weidmann – claim (see quotes above) that only “sound public finances” based upon lowered fiscal spending and deficit reduction now, regardless of prevailing macro-economic conditions, will pave the way for sustainable long-term economic prosperity. But, after developments last week, a major dispute on the appropriate direction and policies for the Eurozone economies – pitting the German and French governments on opposite sides of the argument – seems almost inevitable.
Key Questions : What have been the effects of the “austerity” programs pursued by Eurozone countries since 2009 in terms of restoring economic growth, employment, and public finances? How have cuts in government spending during the deepest global recession since the 1930s Great Depression affected the lives and wellbeing of Eurozone populations? What changes are now needed to ensure stronger future prospects in the years ahead? Politically what are the options open to European political leaders in the EU and in national governments?
Impact of “Austerity” Programs in Eurozone : From 2010 onwards, all Eurozone countries launched draconian programs to cut government spending aimed at containing deficits and debt levels. These programs were particularly severe in the most vulnerable, debt-ridden countries – in southern Europe (Greece, Spain, Portugal, Italy) and elsewhere (Ireland). At the same time, under EU rules, governments were required to fully compensate creditors of failing private banks without any ability to reschedule maturities of government debts. Yet the latter rose rapidly due to much reduced tax revenues because of the recession, and greatly increased social safety net payments – unemployment and welfare benefits and healthcare. At a time of dramatically reduced global demand in 2009-11, as Irish economist David McWilliams (above quote) notes, coming on top of collapsed private demand, reduced government spending only worsened the severity and length of the recessions in Eurozone countries. Their economic growth has barely recovered above one per cent annually and has slipped back repeatedly. In the worst hit countries – notably Greece, Spain, Portugal, Ireland – the entire national economies have been forced to shrink dramatically. As German economists Truger and Paetz of the Berlin School of Economics and Law noted in 2012, premature fiscal deficit reductions have massively increased unemployment, reduced fiscal revenues and increased government debt levels – resulting in a loss of over five million jobs and a reduction of 3% in economic output. Only in Germany were the effects of “austerity” masked in 2011-13 by a surge in exports to China and India and its relatively lower initial government debt (though that too has risen sharply). In 2014, Germany is also sliding into recession. Its deceptively low unemployment rate of 5.1% hides a considerable rise in low-paid (with no benefits) insecure “mini-jobs” and the lowest hours worked per worker annually of any country in the EU.
Extremely High Social Costs : Prolonged unemployment at far higher than normal levels – 10-25% – with youth unemployment tragically at even higher levels – 20-50% ! – combined with cuts to core government programs assisting the needy with basic living expenses and healthcare – have resulted in a major rise in poverty across the entire Eurozone since 2010. A major study by the International Red Cross published in late 2013 (see above quote) documents this in detail. It notes that Red Cross’ food distribution to the needy has risen by over 75% in twenty-two EU countries! As the Italian daily newspaper ‘Corriere della Sera’ (see above quote) noted only this week, food consumption declined in Italy by 2.5% in the past year alone! Meanwhile, Italian private business confidence is at an all-time low. Small food businesses have seen sales collapse by almost 4% since 2013. In many Eurozone nations, including Germany, millions of citizens have dropped from the middle class into poverty. They suffer from high anxiety due to lack of food, access to healthcare and basic medicines. Perhaps most tragically, a whole generation of youth risks being lost to high quality work and careers – because of high unemployment hitting them right after graduation from college or professional schools. In Spain – and other Eurozone countries – there are many young medical school graduates who for years already have never practiced their profession!
Urgent Need for Major Change in Direction : Across much of Europe, large public demonstrations against their governments’ “austerity” programs have become a widespread – almost weekly – occurrence. Sentiments against the EU, and especially against the German government led by Chancellor Merkel – seen as behind these policies – have been running high. By now, the evidence that ‘austerity” policies have failed is overwhelming across Europe. Not that, as Messrs. Weidmann and Schauble say, “sound public finances” are not important. Clearly in the long run they are crucial. But, “austerity” policies creating a self-reinforcing vicious circle of recession, public spending cuts, increased deficits and rapidly rising debt are not the way to achieve them. Restoring fuller use of now idle resources in the Eurozone economies – especially labor – through policies that stimulate domestic demand and a resumption of growth will be key to improving public finances by raising tax revenues, ultimately reducing deficits and debt in a more sustainable way in the medium term – next 3-5 years. Massively expanding employment – especially for youth – will be key to restoring public confidence. While much has been said about the need for major structural economic reforms in the Eurozone countries – notably in freeing up labor markets – not much has really been achieved to date. Only by convincing far more Europeans they have a true ‘prosperity stake’ in such reforms will they stand much chance of lasting success. Since service payments on government debts that are still far too short-term in maturity (average of three to five years) place are heavy burden on already strained public finances, the Eurozone needs urgently to consider revisiting its Financial Stability Pact to permit much longer term rescheduling of government debt.
Political Challenges of Charting a New Way Forward : The inevitable show-down between pro-“austerity” forces led by Germany’s Angela Merkel and other major Eurozone governments – notably France and Italy – whose continuing economic weakness is causing political crises at home – is now clearly on the near term horizon. How it is handled will literally decide the future of both the Eurozone and the E.U. for the next decade. In challenging establishment political parties more than ever before, a large majority of Europeans have already voted silently against “austerity”. If the Germans wish for the European Union to have a future with resumption of prosperity and success, they had better start listening and showing far more flexibility than hitherto. Some years ago, before the current crisis, Wolfgang Schauble said of the Eurozone : “This much is true: When we created the euro, it wasn’t possible to create a political union along with it. People weren’t ready for that. But since then, they’ve grown more willing to go in that direction. It’s a process, one that is sometimes laborious and sometimes slow. But it’s important to keep the populations involved.” It is earnestly to be hoped that Mr. Schauble and his compatriots heed his words now! I, for one, trust they will!