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Austerity Plans In Europe May Cause More Harm Than Good

by William Denous

In May many countries brought in measures to reduce public deficits, reassure the markets and stop the fall of the euro.

These measures were encouraged by the European Commission and the International Monetary Fund. Both entities wanted to reassure the markets about the value of the euro and the capacity of some European countries to pay back their debt.

Ireland was the first to bring in austerity measures. In 2009 Dublin adopted two plans to cut the public deficit to 11.5% of GDP in 2010, after it reached 14.3% in 2009.

At the beginning of May Greece adopted a plan to reduce its public deficit (14% of GDP last year) and to bring it back under the European threshold of 3%. The Greek government said it would try to achieve this before 2014. This massive austerity plan combines higher taxes with lower salaries in the public sector, lower social welfare, retirement reforms and labour market reforms.

Portugal, Spain, and Italy have brought in cost-cutting measures, and others, like France and Germany, are likely to follow suit.  Non-eurozone countries like the UK, Denmark and Romania have recently announced that severe austerity treatment is in the pipeline. These measures were intended to reassure the world about the health of the European economy, but have started to raise worries.

Although economic indicators showed a global recovery in the past months, unemployment rates in most European countries continue to increase which indicates that the situation is fragile. Economists worry that setting up too many austerity plans at the same time may halt economic recovery in Europe.

Some analysts claim that governments should wait for growth to be steady before launching austerity policies. In this way governments could avoid the swift increase in unemployment and decline in consumption that austerity measures often bring. Investors also doubt whether countries will be able to implement the measures they have proposed.

Last year countries were under pressure to save the banks in order to save their citizens’ money. Now citizens are under pressure to save their countries from bankruptcy.

The depreciation of the euro is the only glimmer of light in the European economic picture. But paradoxically many European governments are trying to stop it. By boosting Europe’s exports the euro depreciation could propel growth in Europe. However, a weaker euro will not be of great help for countries like Portugal, Spain or Greece whose economies do not rely heavily on exports.