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Eurozone Debt Crisis Exposes What EU Leaders Fear Most

Politics / Eurozone Debt Crisis May 31, 2013 - 11:26 AM GMT

By: Money_Morning


David Zeiler writes: European Union leaders have seemingly changed their tune lately on how best to deal with the long-running Eurozone debt crisis.

Increasingly, EU politicians have been sounding the theme that economic growth - not Eurozone austerity - is the answer, and that deadlines set for reductions in public spending needed to be loosened.

It started about a month ago, with none other than European Commission President Jose Manuel Barroso.

"While I think this policy [of austerity] is fundamentally right, I think it has reached its limits," Barroso said. "A policy to be successful not only has to be properly designed, it has to have the minimum of political and social support."

Shortly afterward, French Prime Minister Pierre Moscovici chimed in, "We're witnessing the end of the dogma of austerity."

Meanwhile, the European Commission seemed to confirm the policy shift when it recently extended the deadlines for most of the troubled EU nations to fix their budget deficits.

News headlines throughout Europe trumpeted the "end of austerity."

But what the EU leaders have really done is buy themselves more time by stretching out the Eurozone austerity policies - which are mostly still in place - over a longer period of time.

Why EU Leaders Fear Eurozone Austerity

Since the wealthier nations of Europe, primarily Germany, started imposing austerity on the deeply indebted nations like Spain, Italy, Ireland, Portugal and Greece, the economies of those nations have contracted severely.

Most of those countries have plunged into deep, painful austerity-driven recessions. For example, unemployment in Spain is an alarming 26.7%; in Greece, it's 27.2%.

And the situation looks to be getting worse.

In its mid-year update to its report on the global economy, the Organization for Economic Cooperation and Development (OECD) said the Eurozone economy will shrink 0.6% this year, up from 0.1% drop it predicted six months ago. The OECD also forecast that unemployment in both Spain and Greece will rise past 28%.

The deepening Eurozone debt crisis has led to social unrest and public backlash against the leaders who agreed to the austerity measures in the first place. Disgruntled electorates have tossed out governments in every one of the troubled nations.

The primary focus of politicians in a democracy is to save their own skin. So it's little wonder that "austerity" has become a dirty word among the EU's elected leaders.

"Austerity is very unpopular," said Money Morning Global Investing Specialist Martin Hutchinson.

But countries deep in debt can't afford to return to their spendthrift ways, either. So instead the EU is taking a page out of Washington's book by postponing the budget deficit rules and kicking the austerity can down the road.

Yet Eurozone austerity is pretty much unavoidable.

"The idea that there will now be deficit spending, that the age of austerity is finished, is misleading," one EU official told Reuters on condition of anonymity. "On the margins, we can postpone budget consolidation by a year, or by two years, but it's not really the answer. The answer is growth, and that is only going to come through structural reform and improved productivity."

What Could Help the Eurozone Debt Crisis

Hutchinson agrees that austerity is necessary and growth is the goal, but said EU leaders could be a lot smarter about it if only they could muster the political will.

"Almost all the austerity has taken the form of increasing taxes, which hurts economic growth, unlike cutting spending, which helps rather than hinders growth because it diverts resources to more productive uses," Hutchinson said.

The EU faces an admittedly thorny problem in trying to reduce debt while not destroying economic growth.

But the EU could make its task easier by addressing some other key issues, mainly by making the union's economies more competitive globally. Of course, that would mean dealing with inefficiencies in labor markets, as well as reforms in pensions and reductions in government services.

"Member states should now intensify their efforts on structural reforms for competitiveness," Barroso acknowledged at a news conference last week. "We need to reform, and reform now. The cost of inaction will be very high."

Such reforms would help spur economic growth, but would prove politically unpopular - which is why they probably won't happen.

Meanwhile the clock keeps ticking on the Eurozone debt crisis. EU leaders have managed to duck an implosion of the EU several times over the past several years - Cyprus was the most recent close call - but they can't avoid it forever.

And postponing austerity and other remedial actions makes it all the more certain that when the Eurozone debt crisis finally does implode, the disaster will be that much more severe.

Hutchinson thinks that any one of several countries could be the catalyst that sets off the next chapter in the crisis, or even sets the end game in motion.

"Greece and Cyprus are basket cases," Hutchinson said. "And over the next year or so, France or Italy will get in a real bind, and we'll be back in a big crisis again. Both those countries' trajectories are unsustainable."

More on the EU trouble: Eurozone Debt Crisis: Now It's a Hopeless Game of Whac-a-Mole

Source :

Money Morning/The Money Map Report

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