Billionaire George Soros recently announced his predictions that Germany would be in a recession by the end of the year. While the country has remained mostly unaffected by the deepening recessions in the failing countries around it, there are now signs that the German economy has begun to contract. The last quarter, GDP shrunk by 0.6%. Soros claims that Germany is pulling the rest of the Eurozone down with its insistance on strict monetary policy and austerity.
Indeed another Eurzone country, Portugal, recently announced recently announced its intention to make deep cuts into welfare, health and education costs in order to bring its budget back under control. Are these the policies failing countries really need to grow out of a recession? Or are these cuts just going to add to the problem and make the Euro contagion spread farther? Soros seems to think that after so many countries trying austerity measures and none of them succeeding, that it is perhaps time to try a different approach. He may very well be right.
Another potential response to the Eurozone crisis would be expansionary monetary policy. Many large Central Banks worldwide have used policis such as Quantitative Easing to some success. Just last week, Japan announced an aggressive increase in monetary policy. One of the biggest pitfalls of aggressive monetary practices is inflation. Germany has therefore been too afraid to allow for such policies to take place. If Germany wants the Eurozone to succeed and avoid recession itself, it may very well need to consider a new approach. Expansive action on the part of the ECB could potentially make a huge difference for the fate of the currency and the content at large.
I definitely find the question of austerity pretty interesting. It feels like there are so many arguments for and against bailouts versus austerity measures yet which is the right answer? I think that the upside to austerity if it is addressed properly is the forcing of consolidation of government programs. It is widely known that at least in the US there are hundreds of duplicate programs working on domestic issues from education to public health to poverty reduction. If increased efficiency comes from austerity measures then I would say it is worth it but if less spending instead of smarting spending happens then I don't think austerity is addressing the root of the problems. Add to the fact that in a rough economy austerity directly contributes to unemployment at least in the short-run and it makes the idea of spending cuts very controversial indeed.
ReplyDeleteI agree with Garrett that a well thought out austerity program is probably a better way to go and will increase efficiency. I just wonder how likely it will be that citizens of countries facing these economic problems are to agree to these measures. Its already come up how people in Spain and Italy react when some government programs get cut, and I just don't think people will be willing to compromise. There will obviously be a bit of pain at first when these programs begin, but the long run results should be worth it.
ReplyDeleteIn times of a recession, any austerity program will slow down a country's economy even more. The overall effect of cuts in government spending are a decrease in overall output, decrease in demand, and decrease in tax revenues. In order to decrease a deficit, economic growth is needed. Thus, austerity policies are largely self-defeating since they ultimately cripple growth and reduce consumer spending.
ReplyDeleteEven though austerity is used primarily for reducing the deficits, one must pay close attention to the amount of those that will be jobless due to these extreme cuts in spending. According to the International Labor Organization, some new 10 million more workers are now jobless than they were prior to the crisis. The ILO went on to reject austerity measures, claiming that they would not address the root causes of the crisis. Instead, a job-centered approach is needed in this situation to keep employment affloat before it gets worse.
ReplyDeleteI do think Austerity is good for the EU. Keep in mind that austerity tough medicine and it will take some time to get back the EU back on track. At some point however, governments need to STOP the wasteful spending. Sure, growing your way out of the problem sounds good. However, it has not worked thus far. So, the party of over – it is time to get back to basics.
ReplyDeleteIt is time to STOP wasteful spending and get back to what works - good old savings and investment.