The wrong austerity cure

Imposing drastic cuts to services will not solve the banking crisis engulfing Europe.

"Fiscal profligacy did not cause the sovereign-debt crisis engulfing Europe, and fiscal austerity will not solve it. On the contrary, such austerity has aggravated the crisis and now threatens to bring down the euro and throw the global economy into another tailspin.

In 2007, Spain and Ireland were models of fiscal rectitude, with far lower debt-to-GDP ratios than Germany had. Investors were not worried about default risk on Spanish or Irish sovereign debt, or about Italy's chronically large sovereign debt. Indeed, Italy boasted the lowest deficit-to-GDP ratio in the eurozone, and the Italian government had no problem refinancing at attractive interest rates. Even Greece, despite its rapidly eroding competitiveness and increasingly unsustainable fiscal path, could attract the capital that it needed.

Deluded by the convergence of bond yields that followed the euro's launch, investors fed a decade-long private-sector credit boom in Europe's less-developed periphery countries, and failed to recognise real-estate bubbles in Spain and Ireland, and Greece's slide into insolvency. When growth slowed sharply and credit flows collapsed in the wake of the Great Recession, budget revenues plummeted, governments were forced to socialise private-sector liabilities, and fiscal deficits and debt soared." 

 Laura Tyson
(Former chair of the US President's Council of Economic Advisers.)

Via Al Jazeera. (Note that Al Jazeera are often a good alternative to mainstream Western media)

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