Sunday, January 29, 2012

Le Monde: European Austerity Deemed Ineffective

Both Rationale and Effectiveness Put in Doubt
A January 2012  article printed in Le Monde deems austerity to be ineffective. While German Chancellor Angela Merkel has presented the current budgetary arrangements as a way to emerge from the crisis, many voices across Europe are starting to loudly disagree. 

Among other sources, the article quotes American economist Joseph Stiglitz on the matter. "The adjustment policies in the U.S. and Europe will not solve the economic crisis. The budget deficit is not responsible for the crisis, on the contrary, the crisis that has caused the budget deficit." This was said by Stiglitz at an economics conference in Argentina last month. 

While it's true that placing blame more accurately does not necessarily lead to an effective solution, a correct view of the situation does help put the current economic situation into perspective. 

The article also quotes Andrew Grjebine, the director of the Sciences-Po Centre d'Etudes et des Recherches Internationales (CERI-Sciences-Po), who called a European recovery based solely on the pillar austerity both unsustainable and flat out destructive. The key, Grjebine says is not to reduce the level of growth in order to pay down the debt. That simply leads to a viscous circle which is difficult to emerge from. This is especially so in the case of countries who currently need strong economic growth, such as Spain and Portugal.  

Along the same lines, in his recent NY times op-ed US economist Paul Krugman recommends simply trying to outgrow the debt by employing how growth policies in order to ensure that the GDP grows faster than the debt. 

Another truth which may ultimately emerge is that the international attempt to force austerity on countries who already have desperate economic situations will simply lead to mass protests and possibly even widespread violence. Let us not forget that the fall of Ben Ali began as a protest against unemployment.
About the Author:
Max Berre is an economist who has worked as a sovereign debt expert at the Inter-American Development Bank in Washington and has taught financial economics at Maastricht University in the Netherlands. 

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