SALON

Wednesday, Mar 7, 2012 1:11 PM UTC

The EU austerity disaster

Draconian spending measures are plunging the euro zone deeper into a double-dip recession

By

Topics: GlobalPost, European Financial Crisis, European Union,

The EU austerity disaster European Trade Union members demonstrate for employment and social justice in front of the EU Council in Brussels, Wednesday Feb. 29, 2012 (Credit: AP Photo/Geert Vanden Wijngaert)
This article originally appeared on GlobalPost.

BERLIN, Germany — Europe is on the hunt for growth, but has little idea where to find it.

Global Post

Many EU countries are being forced to follow a strict austerity path to slash their debts, but these measures seem to be sapping their ability to grow their economies and create jobs.

Some analysts warn that in the absence of measures to boost growth, more bailouts and debt write-downs could be in the cards.

The latest figures are certainly worrying.

The euro-zone economy contracted by 0.3 percent in the fourth quarter of 2011, the EU’s statistics office Eurostat confirmed on Tuesday, and unemployment reached an average of 10.7 percent in January, the highest since the euro was introduced in 1999.

That figure masks the huge discrepancies within the bloc. For example, while Spain’s unemployment is now at 22.9 percent, Austria’s is only 4 percent.

Most attention recently has focused on the drama in Greece, which has required a second bailout in two years to keep from defaulting on its debts.

The embattled country has been prescribed severe austerity in recent years to tackle its alarming public debt mountain, yet the medicine seems to be killing the patient. The Greek economy shrank by 6.8 percent in 2011. The bulk of the new 130 billion euro ($172 billion) bailout will go to lenders rather than being used for any measures to boost growth.

The Greeks are not alone. Ireland and Portugal, the other two recipients of bailouts from the troika of the European Central Bank, the European Union and the International Monetary Fund, have also had to sign up to reforms and punishing public-spending cuts as a condition for the funding.

Portugal in particular is struggling to find growth prospects. Last week, Finance Minister Vitor Gaspar announced that the economy is now expected to contract by 3.3 percent this year, instead of the previous forecast of 3 percent. Unemployment has soared to over 14 percent and the government is even encouraging people to emigrate. Last week President Anibal Cavaco Silva called on the government not to impose yet more austerity on the country’s “new poor.”

And even the austerity drive may not be achieving the government’s aims. Borrowing costs are still prohibitive at 13.07 percent, and Standard & Poor’s recently reduced the country’s rating to junk. “Portugal is doing the best it can to spread the message that we are not Greece, that we are implementing reforms,” said Luis Faria, director of the Lisbon-based Contraditorio think-tank. “But the market is still waiting for credible signals.”

Although Lisbon has managed to cut the deficit from 9.1 percent in 2010 to 5.6 percent last year, that is largely on the back of one-off measures such as transferring banks’ pension funds to the state, says Faria.

He argues that Lisbon will not be able to return to the bond markets any time soon. “It seems obvious now that either another bailout will be negotiated or orderly default will be the solution.”

Meanwhile, Ireland may be the poster boy for European austerity, even managing to see a slight growth of 0.9 percent last year after three years of contraction.

Yet it too is suffering from the negative consequences of austerity. Businesses are struggling and the unemployment figure has soared to over 14 percent, and would probably be higher if it were not for emigration. And while exports have driven the recovery, the rest of the economy is extremely sluggish.

“The prospects are quite poor for Ireland,” said Tom O’Donnell of the TASC think-tank, based in Dublin. “I don’t think it’s accurate to say that we are a successful example of austerity. Austerity has been very damaging, in terms of growth and demand.”

Particularly galling for the Irish is that the punishing cuts and tax hikes are required in large part to pay off the colossal debts of reckless banks who bet on the country’s massive property bubble. The Irish government is currently committed to paying 3 billion euros a year for the next 15 years to the unsecured bondholders of the worst offender, Anglo Irish Bank — a massive burden on such a small country.

With the economy only expected to grow by 0.5 percent this year, the prospects of returning to the bond markets in 2013 are fragile, something acknowledged by the IMF only last week.

O’Donnell says that many economists believe that Ireland will probably require a second bailout, which would be under the auspices of the European Safety Mechanism, the new rescue fund. That may well be a consideration for Irish voters who face a referendum on the fiscal pact, as its ratification is a precondition for the rescue fund’s support.

More GlobalPost

More Siobhan Dowling.

Next Article

Related Stories

More Related Stories

Featured Slide Shows

The week in 10 pics

close X
  • Share on Twitter
  • Share on Facebook
  • Thumbnails
  • Fullscreen
  • 1 of 11
  • Lisa Montgomery embraces her nephew Thursday after a tornado tore apart her home in Cleburne, Texas. The twister killed six people and destroyed entire swaths of the North Texas town.
    Credit: AP/LM Otero

  • Jack McMahon, the defense attorney for abortion doctor Kermit Gosnell, speaks outside the Criminal Justice Center in Philadelphia Tuesday. His client was convicted of killing three babies in his clinic, and will serve multiple life sentences.
    Credit: AP/Matt Rourke

  • A photo taken Monday captures Vice President Joe Biden's response to a Milwaukee second-grader's innovative proposal to end America's epidemic of gun violence. This guy!
    Credit: AP/Jenny Aicher

  • Sen. Rand Paul, R-Ky., flanked by a grouper-eyed Michele Bachmann, addresses the IRS' admission that it targeted Tea Party groups in advance of the 2012 election. In an op-ed for CNN Thursday, the Kentucky senator slammed the president for his faux outrage.
    Credit: AP/Molly Riley

  • Ousted IRS chief Steven Miller is sworn in on Capitol Hill Friday. Miller testified before the House Ways and Means Committee on the extra scrutiny the agency gave conservative groups applying for tax-exempt status.
    Credit: AP/J. Scott Applewhite

  • Attorney General Eric Holder pauses as he testifies on Capitol Hill before the House Judiciary Committee Wednesday. Holder is under fire, among other things, for the Justice Department's gathering of phone records at the Associated Press.
    Credit: AP/Carolyn Kaster

  • O.J. Simpson sits during an evidentiary hearing at Clark County District Court in Las Vegas, Nev., Thursday. Simpson, who is currently serving a nine-to-33-year sentence in state prison for armed robbery and kidnapping, is using a writ of habeas corpus to seek a new trial.
    Credit: AP/Las Vegas Review-Journal/Jeff Scheid

  • Major Tom to ground control: On Sunday astronaut Chris Hadfield recorded the first music video from space, a cover of David Bowie's "Space Oddity."
    Credit: AP/NASA/Chris Hadfield

  • When it rains it pours. President Barack Obama speaks during a news conference Thursday with Turkish Prime Minister Recep Tayyip Erdogan, inexplicably inspiring an #umbrellagate Twitter meme.
    Credit: AP/Jacquelyn Martin

  • A smoke plume rises high above a road block at the intersection of County A and Ross Road east of Solon Springs, Wis., Tuesday. No injuries were reported, but the the wildfire caused evacuations across northwestern Wisconsin.
    Credit: AP/The Duluth News-Tribune/Clint Austin

  • Recent Slide Shows

  • Share on Twitter
  • Share on Facebook
  • Thumbnails
  • Fullscreen
  • 1 of 11

Related Videos

Comments

 19 Comments

Comment Preview

Your name will appear as username

You may use these HTML tags and attributes: <a href=""> <b> <em> <strong> <i> <blockquote>

Salon is proud to feature content from GlobalPost, an awarding-winning international news site that focuses on original reporting from journalists stationed around the world. GlobalPost combines traditional journalistic values with the power of new media to offer a fresh perspective on global developments.

follow salon

Most Read

Popular on Reddit

links from salon.com

From Around the Web

Presented by Scribol
listener_new_rect The Listener: So long, Sookie Stackhouse

Recommendations