Myth #4: „There is no alternative to austerity“

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Austerity is not the solution, it is the problem

Even though the German federal government would like to make us believe the contrary, the stark reality is that nation states cannot just simply ‘save their way out of the crisis’.At first glance it sounds logical that countries – in the same way as over-indebted households or firms – reduce spending and/or increase revenue to ‘balance the books.’

myth 4

However, this logic is misleading from a country perspective, since the expenditure of one part of the economy represents the income of the other. This is especially true in times when key international trading partners are also reducing their expenditure and thus demand for European goods, and when the domestic economy hardly grows. Thus, if households tighten their belts, companies cut short on investment and governments reduce public expenditure, national income shrinks as long as we do not shift our adjustment burden to the world.

Due to drastic austerity measures, economic output (gross domestic product – GDP) in the problem countries has fallen so massively that the debt ratio, i.e. the ratio of government debt to GDP has increased even further. Although some governments cut their budgets fiercely, often by slashing social expenditure, the end result achieves exactly the opposite effect. Even though the consolidation of public finances is more than necessary in some countries, this self-defeating austerity has widely been criticised, not least by the International Monetary Fund (IMF).

It goes without saying that Europe needs solid public finances, especially for providing essential public services. But when reducing total debt levels we should give priority to the balance-sheet repair of households and businesses and therebylay the foundation for a self-sustained recovery. Once the EU economy has returned to growth, the consolidation of public finances would clearly be more effective and less painful.

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