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December 05, 2012

Austerity Still Taking a Bite Out of Europe

Posted in: Uncategorized

George Osborne

Chancellor of the Exchequer George Osborne: The austerity beatings will continue until morale improves

While debating how much austerity outside of the magic no-budgetary-impact spending on the Pentagonto enact, the United States could take a lesson from, well, from the rest of the developed world. The relative lack of austerity in the US compared to Britain and the rest of Europe led to better economic performance (and it’s important to say “relative,” because US fiscal policy turned negative for growth at the federal level in 2010, and at the state and local level it’s been full-speed ahead for austerity since 2008).

To just isolate Britain for a moment, this is a country that could see a triple-dip recession, thanks to the conservative government’s austerity program, only ceased by mandatory spending this summer on the Olympics. Austerity economics clearly have not worked. And yet, stubborn Chancellor of the Exchequer George Osborne plans to continue the austerity program until it gets the desired results. The beatings will continue until morale improves.

Britain is facing an additional year of austerity after the government said Wednesday it missed one of its self-imposed debt reduction targets because the economic recovery was weaker than expected.

George Osborne, the Chancellor of the exchequer, said it would take four years instead of three for Britain to start reducing its debt as a share of national income [...]

“It’s taking time but the economy is heading in the right direction,” Mr. Osborne said. “It’s a hard road but we are getting there. Britain is on the right track.”

“Turning back now would be a disaster,” he added.

Gee, I wonder why the economic recovery has been weaker than expected? Could it be that firing public workers and reducing disposable income leads to less consumer spending and lower tax receipts and less economic activity overall? Osborne, predictably, blamed everyone but himself for the recession, including slower growth in China, the Eurozone crisis and even the fiscal slope uncertainty in the US. Physician, heal thyself. By the way, what Osborne is really saying here is that deficits as a share of GDP won’t even REDUCE under austerity, which is the stated goal of the program, for years.

Meanwhile, consumer spending has dropped off the cliff in Europe, with retail sales falling 1.2% month-to-month and 3.6% year-over-year in the Eurozone area. For all the talk of a renaissance in Europe, that really only refers to bond yields and debt service. The real economy remains in a total crisis, with double-digit unemployment all over the place, up to 25% or so in Spain and Greece. And the combination of the Great Recession and the poisonous austerity cure is the culprit.

Far be it for me to say that the US could perhaps learn from the experience of the rest of the world. Maybe we’ll have a “uniquely American” result from austerity in a liquidity trap at the zero lower bound of interest rates. But I highly doubt it.


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