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Scandinavia Today / Europe



Austerity measures are killing economic growth and worsening debt situation in Europe - Report

Wednesday, 31 October 2012
The high-level austerity measures being adopted vehemently across various European countries are leading to nowhere as analysts see it costing more than healing the economies. 

A British leading nonpartisan economic think tank, London-based National Institute for Economic and Social Research (NIESR) said on Wednesday that these measures are self-defeating and are stifling economic growth and raising rather than lowering debt ratios.

If there is some body out there who had seen that this wonton persistence on austerity will not work, it is the Nobel Economic prizewinner, Paul Krugman. He had been against the view that such approach in economic growth especially after a recession was unsustainable because taking money out of the economy was like sucking air out of a helium balloon. With no helium in it, it will not float.
Paul Krugman has been attacked and insulted by the right wing sector of both politics and the media, which has been bent at "cutting the debt as fast as possible."
Image: Cull from Channel 4. UK
Examples of these countries where intense austerity have been carried out stand out clearly. The UK is a capital example where such austerity measures were introduced  and since then the economy went into free fall and is only in this quarter that the economy saw some sort of growth. Even with that, economic sentiment in the UK is still weak according to analysts' reviews.

In a damning examination of Europe's coordinated fiscal consolidation NIESR said the ratio of debt to gross domestic product would be around 5 percentage points higher in both the U.K., and the euro zone because of the spending cuts and tax rises pursued from 2011 to 2013.

In its first ever study to determine how the various austerity programs have affected economic development, NIESR identified that the implications of its study is that the current austerity strategy being pursued by individual member countries, as well as the EU as a whole, is fundamentally flawed and is making matters worse.

"Not only would growth have been higher if such policies had not been pursued, but debt-to-GDP ratios would have been lower," the report, written by economists Dawn Holland and Jonathan Portes, said. "It is ironic that, given that the EU was set up in part to avoid coordination failures in economic policy, it should deliver the exact opposite."

When compared to the USA, when Barack Obama came to office, the situations there was worse than what is seen here in Europe. He injected money in the economy, which saw the revival of some key sectors that was being washed away by the economic collapse. We note the automobile sector, which he bailed out, the financial sector and some relief to the real estate sector. The US economy has healed far more than European economies, which saw capital sucked out of them in the form of austerity.
(We note here that the US economy is still in the growth path and are not endorsing that the economy has fully recovered from its demise 4 years ago. But when compared with Europe, the US is moving on nicely and had it not been political deadlock, the US economy would even been better. )

The NIESR report said that, in less volatile economic circumstances, austerity measures would lead to a fall in debt-to-GDP ratios. However, the effects in the EU are being intensified by the "spillover effect', which means the economic output in each country is reduced not just by its own spending cuts and tax increases but also by those taken by other EU countries due to trade links. As such, the report adds that with the exception of Ireland, debt ratios will be higher in 2013 rather than lower in every EU country due to austerity measures.

Proponents of austerity such as the British Chancellor of the Exchequer, George Osborne argue that having a credible plan to tackle high debt and deficits is beneficial because it reassures international bond investors, leading to lower borrowing costs for countries.

Nevertheless, Paul Krugman and this Wednesday's report look at the issue differently - the direct opposite though not advocated for high borrowing, as the austerity sharks would make believe.
by Team

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