Coordinated austerity in euro-area countries has stifled economic recovery and deepened the crisis across the currency bloc, according to a new technical paper prepared by an economist at the European Commission.
Spending cuts in Germany in particular have made things worse for the weaker members of the euro area through “spillovers” – the economic impact on economies connected to Germany’s– the paper says, adding that limited stimulus programs in richer countries could help the whole of the currency bloc.The paper, which doesn’t necessarily represent the views of the powers-that-be at the Commission, presents some inconvenient conclusions for European authorities from one of their own economists. The European Union and national governments have come under fire from outside economists for pursuing austerity across the euro zone. These critics have argued that Germany in particular should be running bigger deficits to help drag the bloc’s weaker members out of their slumps.
The commission paper backs the critics. It claims that the effects of brutal cuts in the weaker euro-zone countries could have been mitigated if Germany and other core euro-zone nations had refrained from also cutting spending and raising taxes at the same time. “The symmetry of the fiscal adjustments in all euro area countries at the same time has hampered this adjustment, with negative spillovers of consolidations in Germany and other core euro area countries further aggravating growth in deficit countries,” the paper says.
“These negative spillovers have made adjustment in the periphery harder, and have further exacerbated the temporary worsening of debt-to-GDP ratios in programme and vulnerable countries,” it concludes.Analyzing austerity between 2011 and 2013 in Greece, Italy, Spain, Portugal, Ireland, France and Germany and the rest of the euro area as one bloc, the paper finds that the impact of cuts in euro-area countries didn’t just hit the domestic economies but stalled an economic turnaround across the currency zone...