Austerity and the European Economy

European money

Euro Money

Current Economic State in Europe

The European economy has experienced extreme economic trouble due to the recent worldwide economic crisis and has yet to embark on a recovery.  The economy is expected to shrink in 2013 for the second consecutive year.  The European Central Bank announced the region’s banks planned to repay less than half of expected amount of low-interest loans from last year and Moody’s Investors Service has downgraded Britain’s government bonds from its top AAA rating.  While many countries around the world have suffered from the economic downturn, Europe has continued to struggle and has yet to show progress towards revival.

European Government Response to Economic Trouble

Since the worldwide financial crisis in the past few years, European countries have taken an approach to solving their economic problems implementing austerity packages, cutting down government spending, and laying off public workers. German, British, and European bank leaders have followed a course of austerity in hopes of cutting debt and achieving financial stability.  They believe fiscal consolidation and growth to go hand in hand and that there cannot be any sustainable growth while debt is being created.  They believe that governments can facilitate the balance between fiscal consolidation and growth by introducing structural reforms and making sure spending cuts and tax increases do not damage capital investment.

The Effect Austerity Has Had on the European Economy

Europe has received a large amount of criticism for its reaction of austerity to the financial crisis.  There are many debates that austerity is creating a self-perpetuating cycle where the state spending cuts diminish demand, weakening tax revenue and furthering the strain on government finances.  The reality is that the European economy continues to decline and has yet to show signs of growth.  The European Union’s total government debt relative to their annual economic output was at 90 percent of gross domestic product and had not changed throughout 2012.  The European Commission announced in February 2013 that it expects the economy of the Eurozone to shrink by 0.3% this year, following a 0.6% decline in 2012. Austerity has also pushed European unemployment to a record high and it is expected to rise to 12.2% in 2013 after an 11.4% in 2012.  Greek unemployment has reached 27% while Spain’s unemployment rates have reached 26.9%.  Many opponents to austerity blame those austerity measures and efforts to deal with economic troubles in Europe for having reduced economic growth and caused debt to grow, instead of promoting economic growth and diminishing debts. The International Monetary Fund (IMF) and the International Labor Organization have both cautioned Europe against any further fiscal consolidation.  The National Institute for Economic and Social Research also claims debt amount in Europe will be higher and not lower because of austerity.  Politicians and central bankers across the world have warned against fiscal complacency and urged European governments to cut budget deficits and make economies more competitive.

Despite criticism and IMF suggestions, the leaders of the European economy stay committed to the course of austerity and believe in its ability to bring about a revival of the economy of Europe.  Many believe that it is too simplistic to blame the austerity measures for the current continued economic trouble in Europe.  They suggest it could be a result of a massive drop in confidence of international investors in the ability of the Eurozone to overcome its problems while others say it could be declining household spending.  The debate continues on whether or not austerity measures are to blame for the lack of economic growth and revival, but the reality remains that the financial situation in Europe remains bleak and there have been little to no signs of improvements for the near future.

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About Efraim Landa

My name is Efraim Landa I am an entrepreneur and an expert in venture capital. I am the co founder of Effi Enterprises, a venture capital firm as well as the co founder and CEO of Gluco Vista, a company that is in the process of developing a non invasive glucose meter for those with diabetes.

Posted on May 25, 2013, in economics, Finance, Money, the economy and tagged , , . Bookmark the permalink. Leave a comment.

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