© Dr. Gennadi Kazakevitch
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To your mind do austerity measures bring the desired results, given the current deteriorating economic situation in Eurozone? If not, what other measures should be suggested?
The purpose of the austerity measures is to achieve a more or less balanced government's budget and, ideally, move towards reduction in the sovereign debt. I can see a problem of applying this policy to such countries as Greece, Spain and Italy. These countries have very considerable public sectors. Austerity measures that are mainly the reduction of public expenditure, mean reduction in public sector employment with the negative flow-on effect on the whole economy. Take Greece. The government there already does not collect enough taxes due to country's institutional and cultural problems. The reduction in public money in the economy would worsen the already severe fiscal problem: the amount of collected taxes will reduce further, and this will be a further stage of moving the economy to collapse.
What measures should be suggested? Any measures need to be positive and constructive rather than negative and destructive. Austerity measure will not fix anything, if everyone in the country does not adopt greater fiscal disciple (at least start paying fair share of taxes). Then, the whole package of generally inefficient public expenditure needs to be reconsidered. The government does need expenditure in health, education, infrastructure, and industry policy, but such expenditure should be based on the best world practices. We see Germany ready to bail out the ailing Greece, but don't see equal readiness to promote great German experience of economic governance.
You wrote in your artice "Truckin' on after the deluge": "That is why treating struggling economies with huge stimulus packages ― and therefore even more borrowing, which increases debts ― is about as effective as treating alcoholics by giving them more vodka." Greece and Spain have already received bailout packages, while Cyprus and, it is predicted that, Italy will also seek financial aid. Do you think that providing rescue packages is wise and effective decision in light of the Eurozone debt crisis? Or there should be other measures implemented in order to combat the debt crisis?
I have already mentioned that transition to more efficient fiscal and public expenditure systems is needed.
The irony of the situation is that the sovereign debt catastrophe has hurt the countries where the household debt is relatively low. In other words, normal people in those countries, until recently, did not borrow as much and preferred to live mostly within their means. However, it does not mean that the actual "financial alcoholics" are just the governments of those countries, not the population. The very people, who save their money, do not really want the governments to also save public money on their behalf. Instead, they strongly prefer extensive expenditure on welfare. Why, for example, Greeks think that the retirement age of 55 is OK, whereas Germans are prolonging their working life until 67?Why non-paying-taxes Greeks should be bailed out by German taxpayers?
If more comprehensive reforms of failing economies are not undertaken, just bailing out is a quick fix that will only prolong the agony. If the European monetary system is destined to survive, then the European Union needs to move to more uniformed taxation and public expenditure standards. This would particularly affect social security and retirement regimes. Needless to say, this is more a political than economic problem. Easier said than done.
"A resolution to the crisis should be sought not only in the short-term improvement of the situation in the financial sphere, or an increase in business and consumer confidence, but also in reconsidering long-term goals and strategies." What long-term targets should be suggested to Eurozone, given the present debt crisis? And to the US, which experiences labour market problems?
The conclusion you are quoting was made in the context explaining the recent major financial and economic crisis, which has affected both the EU and USA, and is currently continuing. In my opinion, the explanations of the crisis so far have been rather simplistic. Either they just scratch the surface by naming the subprime mortgage defaults in the US as the supreme catalyst; or they blame the under-regulated financial systems in Western countries that encouraged recklessly risky dealings by some major financial institutions, which amplified the usual downward phase of the investment cycle, when the investments increase faster than purchasing power.
The true explanation needs to be seen in deepening misbalance between rapidly growing production in successfully developing economies, and consumption far beyond means, not supported by competitive and sufficient export-led growth, in developed Western nations.
Therefore, a long-term solution needs to be sought in the "real" rather than in the financial sphere. Either the ailing post-industrial economies of the West reinvent themselves as competitive trading partners of the new manufacturing giants, and return to balanced terms of trade and investment, or further (permanent) crisis and further decline are inevitable.
Read Dr. Kazakevitch's article "Truckin' on after the deluge" here.