Monday, August 6, 2012

Austerity Bites Big in Europe--With More to Come

The above photo (from the ECB website) shows the ECB's Governing Council which just met to address the Eurozone crisis. Unfortunately, they clearly opted to impose more Eurozone austerity despite overwhelming evidence that austerity will not stem the crisis.
Austerity is failing all over the world now and is predictably wrecking economic havoc on the global economy. People are protesting the unlimited largesse shown the megabanks while ordinary citizens bear extraordinary unemployment and deep cuts to social services all at once. Thus, in Spain, where banks were recently bailed out to the tune of $120 billion, dozens of people were recently injured in Madrid while protesting the cuts and the bank bailouts. Spain has now endured an apparently endless economic contraction and unemployment of nearly 25 percent (over 50 percent for youths).

In the UK, where similar austerity measures took hold in the aftermath of the Great Recession the Brits have now suffered three straight quarters of economic recession. Austerity led directly to the worst four year economic performance in Britain in over 100 years.   A new study finds that UK suffered total output losses of about $400 billion from its excessive and ill-timed austerity.

Now this misguided and dogmatic austerity has infected the Eurozone generally, Unemployment for the entire Eurozone now exceeds 11 percent, a Euro era record. Unemployment now has expanded for 14 months in a row since the onset of austerity. Manufacturing is contracting throughout Europe. It has now contracted for 11 consecutive months. Indeed, even Germany is now seeing the most dramatic contraction of manufacturing in three years.

No let-up is in sight. According to the BBC, Spain is slated to slash spending by another 16.9 percent across the board going forward on top of an 8 percent cut from last year. In the UK "at the start of its term in 2010, the Conservative-Liberal Democrat coalition government announced the biggest cuts in state spending since World War II." These cuts are slated to peak in the next few years amounting to a 19 percent across the board cut. These are indeed savage cuts in the pipeline. 

Then, last week ECB President Mario Draghi, after the meeting of the Governing Council, announced that the ECB "may undertake outright open market operations of a size adequate to reach its objective" of stemming the crisis but only if Spain and Italy agree to bailouts with accompanying "strict and effective conditionality." In other words, the ECB will not act without more austerity.

This puts Spain and Italy in an impossible dilemma. They either cede sovereignty and submit to a Greek economic tragedy or they face a high risk of default due to spiraling interest costs. The first choice may well be politically impossible as growing resentment in the south may simply lead to political repudiation of the Euro. In Italy they already are referring to Germany as the "Fourth Reich." The second choice will make Lehman look like a warm-up act. Either way it will be ugly.

One fact is clear: regardless of the outcome in Spain and Italy, the ECB's insistence on more austerity before it acts will certainly feed the deflationary fire spawned by austerity. As I have argued for years only debtor relief and rapid growth will relieve a debt crisis.

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