The plan European leaders agreed on last week to save the euro doesn’t seem to have reassured the markets.
Two rating agencies said the plan worked out in Brussels, which calls for greater fiscal integration, failed to address the immediate crisis of rising debts and the crushing costs of borrowing.
And some economists worry that the EU leaders are wrong to put so much emphasis on austerity without any real plans to stimulate economic growth.
For example, Portugal’s growth rate last year was anemic and the economies of Greece and Ireland shrank.
But the more urgent problem for these three countries was mounting debt. And when it looked like they might default, the European Union stepped in with some bailout money and provided a reprieve.
The three countries swallowed the bitter medicine that was prescribed and, announced cuts in public payrolls and welfare costs — as well as tax hikes.
And while Italy’s new prime minister has talked about the need for growth, he, too, has come up with a tough austerity package. Spain’s incoming prime minister promises similar pain. All this austerity has sparked fierce street protests across southern Europe.
Yet Germany’s finance minister, Wolfgang Schaeuble, shows little sympathy.
“When you are in a hopeless situation of excessive debt, you can’t escape a painful adjustment process,” he said.
Too Much Austerity?
But some economists are warning that the mono-focus on austerity is not only hurting the most vulnerable, it’s making overall economic matters worse.
“Fiscal austerity in the euro zone has now become part of the crisis rather than a solution to it,” says economist Simon Tilford.
The debt burden of troubled euro zone countries is growing faster than their economies.
“So this is the absolute worst of all worlds: fiscal austerity, contracting economies and a dramatic increase in the burden of the debt relative to the size of the economy,” Tilford says. “Because their economies are shrinking and the debt burdens are rising, it’s a very difficult situation and it’s the reason why investors have taken fright because they cannot see, understandably, how various economies are going to grow.”
And unless they grow, Tilford says, these countries won’t be able to service their debt.
German economist Ferdinand Fichtner agrees and adds that the current austerity-only focus risks creating a downward spiral.
“Where the weak economy, which stems from the euro-area crisis, feeds into a weaker labor market situation and that in turn affects consumption again, meaning that the production will drop again,” he says. “And then you have this negative feedback loop and you are quickly in a real recession.”
There are ways debt-troubled countries might try to stimulate growth without spending lots of public money and adding to their debt woes.
Strong euro-zone nations like Germany and the Netherlands could launch stimulus programs and expand public-private partnership schemes, says former banker Sony Kapoor. He says the EU has some funds it could direct to shovel-read projects.
“For example, cross border power transmission, transport infrastructure, green energy investments, broadband investments, which effectively the European Investment Bank could start tomorrow with this new capital increase,” he says.
But it’s hardly clear those efforts, even if implemented, would prove big enough to make a real difference.
For years burdensome bureaucracy and corruption in some Eurozone countries have stifled innovation. Even in Germany, with the strongest economy in the euro zone, legendary red tape is an impediment to growth, especially for startups.
Sascha Kellert co-founded a high-tech firm called Ezeep and applied for a no-collateral loan for startups through the Berlin Investment Bank.
“It was supposed to be a quick loan,” Kellert says with a laugh. “On the website they advertise ‘two weeks,’ but it turned out to be four months.
Economist Gayle Allard says Spain and Italy are talking about cutting rules and regulations and making it easier for companies to hire and fire people. It’s all part of an effort to boost competitiveness and productivity. But so far, she says, it is mostly talk.
“There is talk of making it easier to do business, definitely talk of labor market reform, although they haven’t said how they are going to do it, there isn’t any very popular way to do it,” Allard says. “So unfortunately there is a dearth of ideas.”