Friday, 25 November 2011

Austerity will be a severe instructor

Another bad day....

Yields on government bonds are rising across the Eurozone. With each basis point increase, Europe's access to the bond market is slowly drying up. The policy options are closing up. Soon, the choice for Europe's over-indebted countries will be binary; austerity or default.

Before you ask, dismantling the Euro is not an option. The pain that may emerge from default or reducing the fiscal deficit will be seem mild compared to the chaos and collapse that will follow the demise of the single currency. The Euro may have been a disastrous project, but that discussion ceased to be meaningful over a decade ago. If the Euro falls, the economies of Europe will be wiped out. There might yet be a day for dismantling the single currency but it resides in the distant future.

The preferred option has to be austerity. It will provide governments will some limited ability to determine the timing and distribution of pain. A default will unleash another round of banking failures and sharp reductions in output. The consequences will be pernicious and arbitrary.

Austerity will also teach Europe a long overdue lesson; excessive government borrowing stores up trouble for the future. Sooner or later, there will be a reckoning. After thirty years of excess, that moment has come.


Stevie b. said...

Alice - fair enough, but maybe ongoing austerity that makes pips squeak will prove too excruciating for some, when with one tempting bound and a cheeky calculation or two, they can be free. A quick devaluation, a sigh of regretful but blissful relief and it's off for another trot round some sort of an economic track.

Jim said...

Austerity will not work either. Western populations do not realise the true position. They think things can go on as they were for the last decade or more. They don't realise their true level of wealth creation probably generates 70-80% of current GDP. The balance is based on increasing amounts of debt. Remove the debt boost and you have to face the sort of drop in living standards not seen WW2. They won't wear it. A nation united in a common cause could manage it, but we are in denial about the truth.

Catastrophe is the only way we will be forced face reality. We won't do it voluntarily, as the siren voices on the Left (Borrow more! Spend more! Tax the Rich! etc etc) will prevent any rational discussion of our predicament.

dearieme said...

Something called the Euro may survive, but it won't be the Euro of yore. As Jim says, them days is dead, pet.

Lionel said...


European countries may not realize their true position but they are about to find out. What can electorates do to prevent collapse? Vote in a new government? How does that reduce the debt stock?

droog said...

You speak of austerity as if it were something in the future, as if it were not the current policy across Europe. Be it Greece or the UK economies are slowing down thanks to austerity.

Alice, you and I see the same dots but connect different pictures. I agree with you that Europe's ageing population is making public spending difficult to manage (most nations are struggling with pension and health care costs that have grown over the past decades). To that we can always add healthy portions of more public spending (defence, welfare, etc). But I have no clue how the current cycle of austerity is going to make more people find jobs, or make the elderly need less fuel over the winter.

The solution to Europe's problem has to be more drastic than looking a present budgets and crossing out a few lines. The entire thing has to be re-written almost from scratch. I hope that can be done without throwing the weaker citizens out into the cold. In the end billions of new workers joined the world economy and some jobs are never coming back. What is Europe proposing to do to correct for this shortfall? Letting their frail citizens die? What was the point of creating a European common market if the global economy can undermine and has undermined said market's labour base?