Euro Crisis: Is Austerity Ending? "Nein!" Says Germany

Is this the end of austerity? "Nein!" says Germany, but there should be an easing on it.

Europe is at the epicenter of the austerity experiment. José Manuel Barroso, the president of the European Commission, said that while austerity is fundamentally right, it has reached its limits. A society's most valuable asset, human capital, is being wasted and destroyed. Unemployment in the Eurozone rose to 12.1%, but this all-time high rate hides big disparities: in Greece unemployment is at 27.2% and in Spain 26.7%; but in Austria and Germany, unemployment is at 4.7% and 5.4% respectively. At the same time, inflation in the Eurozone is very low. In the latest quarterly data, the all-items index is estimated to have grown by just 1.2% over the year ... well below the predicted 1.6%. Remember the Phillips Curve?

The rhetoric against austerity has become intense recently, especially when it's not accompanied by any major monetary action to ease the burden. Typically, this unwillingness relates to the stereotypical German fear of inflation. According to Italy’s new Prime Minister Enrico Letta, "fiscal rigor alone will kill us." Letta also told German Chancellor Angela Merkel "if Europe stands only for negative news, for austerity, then we'll see more of these movements against Europe." Likewise, French President François Hollande stated that "we have an obligation today is to make the same effort, but this time for growth, for economic activity, and employment, especially for young people."

In addition, austerity has suffered a double academic blow. On the one hand the Rogoff-Reinhart fiasco was used as a weapon by politicians who warned against any loosening on fiscal rigor because we are "dangerously near the 90 percent mark that economists regard as a threat to sustainable economic growth." In fact, it has even become fodder for television comedy shows (this is awesome, watch it!). On the other hand, IMF economists recognized that the recessionary impact of austerity was more severe than expected.

So will there be less austerity? Again "Nein!" says Germany, at least not until the next elections in September. Austerity is not actually referred to as such in Germany; instead it’s called "sparkurs" (savings course) or "sparpolitik" (savings politics), as austerity sounds "evil" according to Chancellor Merkel. Also, ECB President Mario Draghi argued that "in order to bring debt ratios back on a downward path, euro-area countries should not unravel their efforts to reduce governments budget deficits."

Yet, slowly but surely hopefully, there is still some opportunity for growth in Europe. Relaxing austerity should come along with big reforms. Olli Rehn, the EU economics commissioner, claims that the rate of fiscal retention is slowing in Europe. The 17-nation Eurozone's combined fiscal deficit was 3.7% of gross domestic product, compared with 4.2% in 2011 and 6.5% in 2010.

Also, the European Commission is targeting the structural budget deficit and the new euro zone fiscal rules with a more medium-term approach. As a result, the total amount of consolidation may be spread over a longer period of time.

Even though a major shift in the bloc's fiscal policy, such as a symmetric adjustment, is usually met with resistance by the surplus economies, the commission is now more willing to revise structural reforms and to allow countries to delay meeting fiscal targets in the face of recessions. On May 29 the Commission will decide whether to advise to EU finance ministers to give Paris and Madrid until 2015 to cut their fiscal gap to 3% of GDP, today targeted for 2014.

More importantly, as Barroso emphasized, "a policy to be successful not only has to be properly designed, it has to have the minimum of political and social support." In other words, to promote growth the "confidence fairy" highly needs to be restored!

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Olga Jbeili

I hold an MSc in Development Economics and a Graduate Diploma in Economics from the University of Sussex. Most recently I was working as a research officer at Sussex uni. I previously worked at the Carnegie Endowment in Beirut where I assisted scholars in researches related to food security and land acquisitions, peak-oil and rentier economies, sovereign wealth funds, labour markets among other topics... I am also particularly interested in the political economic situation in the developing and emerging economies and how this relationship might affect growth and long-run development.

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