AUSTERITY - PROVING TO BE ABSURD!

By Ruma Dubey

Let’s take this situation at home. Suppose you have spent money on a huge ceremony at home, the next few months could see you constantly cutting unwanted expenses. But it might not mean taking on another job or cutting down on food.

Or in another home, a DINKS home (Double Income No Kids), suppose a spouse loses the job. Yes, there will be a dip in the earnings but that does not mean the couple will stop paying EMIs. Maybe they might stop eating out frequently, or cut down on shopping or in some cases, do away with the cook or the domestic servant. But it will not be a major life-changing change!

This is how we might practice austerity at homes when ‘recession’ hits us. But at the end of it, surely most would have noticed a change in the temperament and attitude of the members at home – it would usually be depressed or stressed. Once in a while routine shopping trip might lead to impulsive buying binges; more like repressed demand let loose. But lift all restrictions and take things back to normal – moods get better and one might work out ways to get out of the tight situation with a more positive attitude.

And the same logic when extrapolated on a macro level seems true. Many countries in Europe imposed austerity measures to cut costs to deal with recession. But in most cases, it just does not seem to be working. Over the weekend, the National Statistics Institute (INE) reported that Spain had 6,202,700 unemployed workers, the first time in history that over 6 million Spanish workers were jobless. Spain’s unemployment rate rose to 27.16% and youth unemployment has reached 57.22%. And in France, the labor ministry has put out figures which show that unemployment hit record highs in March with over 3.2 million people out of work, a 11.5% YoY rise.

And then in Greece, unemployment rate has risen from 7.7% in 2008 to 27.2% earlier this year, the highest unemployment in the Eurozone. Portugal’s unemployment rate has risen from 14.8 to 17.5% and that of Cyprus from 10 to 14%. Unemployment has gone up sharply in Netherlands and Sweden too.

In terms of economic growth, the Greek economy has contracted over 20% and Spain’s economy by 5% since 2008. The Spanish economy is estimated to shrink by another 1-1.5% this year. UK managed to grow by a paltry 0.3% but everyone was happy with that too!

Austerity in most of the European countries has been in the form of job cuts, higher taxes and cut in Government spending. So they assumed demand and supply to remain same and assumed that merely cutting costs will help put out a better economic picture. This, as we can see has been disastrous. Job cuts have spiraled unemployment, which in turn has cut demand and this meant lower production and thus lower economic growth. Higher taxes have not really resulted in any increase in collections as people have worked out ways and means to avoid tax, most transferring funds to tax havens.

In Spain and Greece, the poverty and misery of people is unbelievable, never seen before in that region. Soup kitchens and charity meals have become critical for many to merely survive.

On the other hand, these austerity measures have widened the gap between the haves and the have-nots. France’s INSEE national statistics institute has put out a report stating that overall French living standards fell 0.5% from 2009 to 2010 but the top 5% of the population saw their revenues rise and especially for the super rich in the top 1% bracket, who saw their wealth go up by  €89,400. Thus the social divide across Europe has increased and the bloc is sitting on the dangerous precipice of massive social unrest.

There are those who support austerity measures stating that if there had been no austerity, Greece and Spain would have been out of the EU and unemployment would have been much higher. But it was bailouts which saved Greece and Spain and because of the debt, they had to cut costs.

You cannot fight recession by cutting down demand; what is required is demand stimulation which could give impetus to growth. Europe has tried to tackle the supply side of the issue, without paying much heed to demand. And that is probably the structural change which needs to come in.

France has already decided to abandon its plan to reduce budget deficit to 3% of annual economic output; Spain is set to announce a Budget on Friday which is expected to provide a stimuli for growth and Portugal, last week presented its ambitious stimulus program.

Austerity has proven to be self-defeating and any more austerity at this stage is a big global risk, not a remedy.