Saturday, May 26, 2012

European Debt Crisis Solution: Austerity and Growth

This article by FDA blogger Rupinder touches broadly on Europe's debt crisis and the French election of Hollande. The bio link (below) on Hollande is pragmatic and perhaps negative. The May 2012 Camp Declaration of balancing austerity with [publicly initiated] growth [or spending] is not a new concept, and it demonstrates how limited current Western thought is when dealing with macroeconomic issues. The reality of Europe is that it cannot afford its social programs and government expenditures because it has lost global competitiveness. So the Germans are correct that austerity is necessary to balance expenditure with revenue. Of course, there will be economic contraction, but that stems from lost productivity. The balance of austerity with growth is simply a short-term measure to buy more time, while in the meantime Europe will sink in further debt or somehow become more competitive, and thereby increase revenue.

European Debt Crisis Solution: Austerity and Growth

The victory of Mr. Franois Hollande in France and the failed attempts to form a new government in Greece after the May 12 2012 elections were both heralds of the people’s demand for a change in approaching and dealing with the European sovereign debt crisis. People’s support for social-democratic parties in these two countries could be seen as an indicator of the unrest caused by the German insistence on increasing austerity measures in the form of government spending cuts and tax increases.

Germany got one half of the equation right by insisting on austerity measures: Europe could not put any more on their credit card, and spending needed to be curbed. Where the German solution fell short was in accounting for how the lack of confidence in these economies and the inability of these economies to spend would then turn away investors.

The instability of these economies would further make big businesses work on their own profits—or even survival—by laying off more people and slowing down production. As demand would dwindle in the face of job losses, so would supply, and the big businesses would need even fewer people to do the work that needed to be done. Thus, austerity measures alone would lead to a downward spiral for economic growth.

The May 18–19 G8 meeting at Camp David may have led to a softening in the German position on austerity in the face of demands by France, UK, Italy, and the US to include capital spending and investment to promote growth in these broken economies. The solution, as many European leaders and President Obama insist, lies in working with both austerity and growth measures. This position is stated in the White House press release of the Camp David Declaration:

6. We agree that all of our governments need to take actions to boost confidence and nurture recovery including reforms to raise productivity, growth and demand within a sustainable, credible and non-inflationary macroeconomic framework. We commit to fiscal responsibility and, in this context, we support sound and sustainable fiscal consolidation policies that take into account countries’ evolving economic conditions and underpin confidence and economic recovery.

7. To raise productivity and growth potential in our economies, we support structural reforms, and investments in education and in modern infrastructure, as appropriate. Investment initiatives can be financed using a range of mechanisms, including leveraging the private sector. Sound financial measures, to which we are committed, should build stronger systems over time while not choking off near-term credit growth. We commit to promote investment to underpin demand, including support for small businesses and public-private partnerships.

(May 2012 Camp David Declarations)

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