Former Treasury Secretary & Harvard-based charmer Larry Summers explains why austerity schemes give him a headache - read his entire piece at the
Financial Times HERE:
Unfortunately,
Europe has misdiagnosed its problems and set the wrong strategic
course. Outside Greece, which represents only 2 per cent of the
eurozone, profligacy is not the root cause of problems. Spain and
Ireland stood out for their low ratios of debt to gross domestic product
five years ago with ratios well below Germany. Italy had a high debt
ratio but a very favourable deficit position. Europe’s problem countries
are in trouble because the financial crisis under way since 2008 has
damaged their financial systems and led to a collapse in growth. High
deficits are much more a symptom than a cause of their problems.
Treating symptoms rather than causes is usually a good way to make a
patient worse. So it is in Europe. Its financial problems stem from lack
of growth...
This means austerity measures at
the national level are likely to be counterproductive in terms of
creditworthiness. Fiscal contraction reduces incomes, limiting the
capacity to repay debts. It achieves only very limited reductions in
deficits once the adverse effects of contraction on tax revenues and
benefit payments are taken into account. And it casts a shadow over
future growth prospects by reducing capital investment and raising
unemployment, which takes a toll on the capacity and willingness of the
unemployed to work.
These considerations are magnified in Europe as a whole. Slowdowns in
one country reduce demand for the exports of others. Increases in
saving and exporting in some countries have to be offset by equal
increases in spending and importing in others. Germany’s enormous
success in recent years has been achieved by becoming a large-scale net
exporter – it would not have been possible without large-scale borrowing
and importing by Europe’s periphery. The periphery cannot possibly
succeed in reducing its borrowing substantially unless Germany pursues
policies that allow its surplus to contract.
Sceptics will rightly wonder how a prescription for more spending by
countries that already have trouble borrowing can be correct. The answer
lies in the difference between borrowing by an individual and by a
country. Normally, an individual helps his creditors by borrowing less,
but a person who stops borrowing to finance commuting to work does his
creditors no favour. Similarly, since for a country income is determined
by spending, a country that pursues austerity to the point where its
economy is driven into a downward spiral does its creditors no favour.
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