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Austerity Fears Come Home to Roost

Written by SuperUser2.

(Business Intelligence Brief) The European situation is starting to show some signs of unraveling, and this will provide some considerable fodder for debate as the weeks progress. Both sides of the debate between austerity and stimulus are asserting that what is happening right now in Europe is just as they predicted, but there are violent disagreements as to whether this is a good thing or a bad thing.

The bottom line is growth has slowed considerably in every nation except Germany and France and, by all accounts, they will be seeing that slowdown very soon themselves. The government help has all but ceased in much of Europe, and the economies in these nations have seen an almost immediate sag. Germany has been powering along on the strength of its export sector and its strategy to hitch a ride on the growth in Asia. Meanwhile, France has been a little slower to pull the stimulus rug from beneath its economy. The hapless PIIGS (Portugal, Ireland, Italy, Greece, Spain) have had no choice but to pull away from almost every element of support, and all of them are falling into funks that may take years to dig out of.

The rest of Europe has stagnated as expected by austerity and stimulus supporters alike. The question is whether this is good news or bad news in the longer term. The austerity position believes there is no way to avoid this pain and the only choice is when to suffer it. The longer Europe waits, the more the problem builds - that will make the solution even more difficult than it has proven to be. The stimulus advocates assert that imposing these restrictions on a weakened economy will only make the situation unbeatable for those who have already been caught in the mess. The people without jobs and the struggling businesses have already been in the tank for two years and now they are being asked to stay in that situation for two or three more. They assert that it would be wiser to let some recovery take hold before addressing the issue.

The response from the austerity advocates is that this sounds like a nice strategy, but the reality is that governments find it impossible to call an end to the party once it gets started. The logic of the stimulus position would have been at its peak in 2006-2007, when the world was riding a massive high and there was no hint at all of fiscal rectitude - only an intense desire to make sure that the good times rolled on and on and on.

Analysis: All of the indices are pointing in roughly the same direction. The majority of the growth that had started to manifest in the latter part of 2009 and into 2010 was attributed in no small part from the fact that there was lots of government encouragement - everything from "cash for clunkers" to subsidized housing rates and direct intervention in the finance system. Most of that is now gone, and the Germans have gone so far as to cut spending in many areas and seems determined to add to the VAT tax at some stage.

The US will be watching all this with intensity. If the Europeans sink into something that looks a lot like a double-dip, the attitude will be that the stimulus doves were correct all along. But, if Europe manages to get by with slow growth that doesn't sink to recession levels, the austerity troops will be thrilled.

Chris Kuehl, NACM Economic Advisor

 

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