Analysis: Europe's austerity zeal risks killing the patient

Wed Dec 14, 2011 1:37pm EST
 
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By Carmel Crimmins and Gavin Jones

DUBLIN/ROME (Reuters) - Europe's "no pain no gain" attitude to solving its sovereign crisis risks exacerbating the bloc's problems, choking off the very growth needed to raise the money to pay down the debt.

From Athens to Dublin, and almost everywhere in between, administrations are imposing wave after wave of spending cuts and tax increases to persuade investors they are serious about improving their public finances and persuade them to start buying euro zone sovereign debt again.

The austerity zeal risks tipping the continent back into recession and a downward spiral of austerity as pitiful growth prospects undermine budgetary targets and ramp up debt burdens, meaning further austerity is required.

"The expansionary fiscal contraction story says that you cut, you show you are serious about cutting and then the confidence fairy will come along and she will start pulling in private investment," said Stephen Kinsella, professor of economics at the University of Limerick.

"The expansionary fiscal contraction story is a lie. You don't cut your way to growth."

With the crisis spreading like wildfire through the currency bloc's core, pushing up borrowing costs to unsustainable levels, countries are relying more on blunt budget cuts, than time-consuming and difficult structural reforms, to get results.

The upshot is ballooning dole queues, shuttered businesses and public services stretched to breaking point.

On the streets of Athens and Dublin poverty has visibly increased with more and more homeless people huddling in doorways. In Spain, emergency wards have been shut and in Italy, retailers are struggling to get by.   Continued...