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European Austerity Do Your Counterproductive Dance!


EuropeanAusterity

In 2009 Europe shared in the fiscal joy that was the crash of all crashes. The answer that the European Union, the bonds market, and the banks saw as the remedy for said fiscal crash was to slash government spending. This slashing approach to the Grand Recession was supposed to trim the budget in the attempt to minimize the debt and to reassure jittery bond market holders.

This approach to an economic downturn is commonly referred to as Austerity. Austerity is from the Latin word “austērus” or Greek “austērós” meaning “harsh, rough, and bitter”. While austerity was supposed to deliver stability, lower the debt, and revive the market of the European economy, what it actually delivered was severe and unconsciousable economic pain.

What Austerity delivered was a further shrinking of the European economy; it lowered governmental tax revenues, and was counter-productive in terms of addressing the depression. In fact, there has never been a major economy that grew by cutting; it is the fallacy that appears to never die. As you shrink an economy (which has its foundation in government) so do you shrink governmental revenue and thus stagnate the economy further! Can you say “Economy 101”?

Here is an attempt at a analogy; your company has just suffered a great economic loss and your answer is to address this loss is to cut your personnel, cut your inventory, reduce advertising, and to cut the services you offer. How exactly will this fix the problem of economic abyss?  If you get shrink the means in which you can make income; how do you recover?  The answer is you DON’T!

There are those that will point to the fact that the overall deficit of the eurozone has shrank over the past years, but this is not evidence of the effectiveness of austerity. It is only one key indicator that one should look at when evaluating economic recovery. One should also be looking at the unemployment rate, the projected and actual length of the recession, imports and exports numbers, the general welfare, and economic contraction.

The European economist at Capital Economics Ben May stated “The news that the eurozone budget deficit shrank again last year will be hailed as evidence by some that austerity is working,”, but he taking a short view of the results. The actually truth is that the European economies has shrank less than anticipated and that this has resulted in a deeper recession. The circular damage done by austerity is ignored by May.

In the end the eurozone’s deficit did drop, but this was made possible by Germany’s economy which did not institute austerity. Germany posted a budget surplus of 4.1 billion euros in 2012 which was a hell of an turnaround from the 20.2 billion euros deficit in 2011. This turnaround was in large part due to an even approach to economic expansion.

Austerity is a harsh and ineffective way to come out to a recession. The fact is that austerity has proven to lengthen a recessions, increase unemployment, shrink economies, inflate prices of commodities, decrease tax revenues and government, and demoralize the general welfare.

In summation, economic uncertainty that is created by inadequate private spending or over-saving leads to certain uncertainty. The solution to this conundrum is that the government should be the employer of last resort. Government can and should do intentional deficit spending,  in other words government investment, in such areas as public works to deliver influx to the economy. This in turn would create jobs, increase demand, increase purchasing power, and feed the economy as a whole which would increase government revenues and provide needed liquidity for further growth. This would create an self-feeding economic circle that grows the country out of an recession. Attempting to balance the budget and cut spending during a recession typically makes recovery take longer and make things worse not better.

Europe you can have your austerity; live long and prosper Eurozone, although I don’t see how you will prosper by continuing austerity. America needs to avoid this approach and the first step is to avoiding it is to repeal our first step towards Austerity, “The Sequester”!

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  1. Joe
    June 5, 2013 at 7:59 pm

    I don’t get it and don’t wanna get it. I am down with the raising of minimum wage as soon as possible. Raising the minimum wage will hook up a lot of workers and give us something to spend. Holla at you later.

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