Europe’s commitment to austerity may blow up in its face

The irony is that Ireland’s recovery is at risk as others follow our approach, write Carmel Crimmins and Gavin Jones

EUROPE’S “no pain no gain” attitude to solving its sovereign crisis risks exacerbating the bloc’s problems, choking off the very growth needed to raise the money to pay down the debt.

From Athens to Dublin, and almost everywhere in between, administrations are imposing wave after wave of spending cuts and tax increases to persuade investors they are serious about improving their public finances and persuade them to start buying eurozone sovereign debt again.

The austerity zeal risks tipping the continent back into recession and a downward spiral of austerity as pitiful growth prospects undermine budgetary targets and ramp up debt burdens, meaning further austerity is required.

“The expansionary fiscal contraction story says that you cut, you show you are serious about cutting and then the confidence fairy will come along and she will start pulling in private investment,” said Stephen Kinsella, professor of economics at the University of Limerick.

“The expansionary fiscal contraction story is a lie. You don’t cut your way to growth.”

With the crisis spreading like wildfire through the currency bloc’s core, pushing up borrowing costs to unsustainable levels, countries are relying more on blunt budget cuts, than time-consuming and difficult structural reforms, to get results.

The result is ballooning dole queues, shuttered businesses and public services stretched to breaking point.

On the streets of Athens and Dublin, poverty has visibly increased with more and more homeless people huddling in doorways. In Spain, emergency wards have been shut and in Italy, retailers are struggling to get by.

“Consumption has been falling pretty steadily since the winter of 2008. Normally in a crisis, it starts with menswear and goes to womenswear and children. This time, it’s hit them all at once,” said Attilio Lebole, head of Textura, a mid-range clothing wholesaler based in Florence.

“Demand is falling, there’s no doubt about that. Only foreigners are still shopping.”

Despite having an estimated budget deficit this year of 3.8% of GDP, below the European average of 4%, Italy has been piling on austerity since the summer, destroying its already poor growth prospects and then responding with still more austerity to make up for the weaker growth.

Italy’s dismal growth prospects and an inability to pass growth-enhancing reforms have been the key reasons given by ratings agencies for downgrading the country, not deficit slippage.

“Italy is paying a very high price for lending credibility to Germany’s push for greater fiscal discipline across the eurozone,” said Nicholas Spiro, head of Spiro Sovereign Strategy.

In the pre-euro days, currency devaluation was the quick-fire route to getting overblown economies back on track. What’s needed now is “internal devaluation” to get wages and domestic prices down. But if everyone is cutting back, where will the demand come from?

Global growth was meant to be the secret ingredient that kept the Irish economy ticking over while it slashed household income — down by an estimated 16% so far and counting — but the spread of austerity measures across the eurozone has shrunk its growth prospects and forced Dublin to cut even harder.

Held up as a role model for other indebted nations, the irony is that Ireland’s recovery story looks set to be tripped up as others follow suit.

Hilary Behan has already closed three of her six children’s clothes stores and cut 18 jobs.

“Every time the Government get a chance they remove any chance of there being any sort of a recovery,” she said.

Reuters