Austerity Policies

Introduction
(Preface)
No one can argue that an economic crisis itself is such a complex and difficult phenomenon. So many economists and politicians think of the ways of avoiding or exiting a crisis in such a way that brings minimum distortion and future negative consequences. When the European Union was created, everyone supported the idea of free movements of goods, services, capital and workforce, but it seems that there was less thought of how to deal with economic crises and with the less successful union members. The whole crisis that the Eurozone has faced in these years is a breaking point for the Union. There are two ways the Union can go: breaking apart or dealing with the crisis through undergoing changes and creating new union mechanisms and systems.
The countries, mostly hit by the economic crisis, such us Greece, Portugal, and Spain have faced increasing governmental debts and inability to repay or refinance them. They need money to cover their spending, but they don’t have funds. The ECB does not seem to want to give extra money to these flailing economies because of 1) the risk of getting high inflation rates and 2) being the short-term solution to the problem, creating even more escalating and severer consequences. The financial markets are not inspired in investing the funds either; they feel big uncertainty in these countries due to their unsustainable budget deficits, and that the floods of funds are running to the most economically successful European countries. It appears that a solution was found: in order to avoid “next” Great Depression in the European Union austerity policies should be implemented. To become again solvent and get funds these countries should first decrease their deficits and pay off the debts. Decreasing deficits refers to cutting on government spending or raising taxes, which is the core idea of austerity. In other words austerity measures “refer to official actions taken by governments, during a period of adverse economic conditions, to reduce its budget deficit using a combination of spending cuts or tax rates.” Austerity policies are the opposite of Keynesianism, where the idea of government spending during recessions is superior.
In the chosen article “Deepening Economic Crisis: Austerity Policies Heighten National Divisions throughout Europe” the author Stefan Steinberg leads discussions about the austerity policies that were implemented in Southern European countries to handle the crisis. He is strongly criticizing such policies and calls for policy change.
“Are such policies absurdity?” – The answer has become clear to many Europeans today.

Austerity in figures
It is important to notice that European countries were forced to cut their government spending at a specific rate, during a specific given time. Such time boundaries and high rates are very tough and almost unrealistic.
Till now the four countries, Greece, Portugal, Spain, and Ireland, have followed the offered austerity policies and reforms, and have experienced frustrating results.
Here is the example of following the austerity policies by Spanish government. It includes :
- €3.5 billion cut in public spending,
- Cuts in benefits for civil servants,
- Privatization of public companies and their “drastic reduction”,
- The liquidation if state assets such as airports and railways,
- 3 percent increase of VAT (from 18 to 21 percent),
- 20 percent decrease in funding for unions and political parties.
Such structural reforms were crucial for the Spanish government, so that it could receive a €100 billion bailout loan from the ECB under strict financial conditions.
The austerity did not only help to meet the economic Eurozone criteria, but even worsened the economic situation in these countries. Companies were going bankrupt, social security and wages have decreased; meanwhile the unemployment rate and government debts have increased dramatically. From 2008 to 2012, government debts to GDP increased from 112% to 156.9% in Greece, 71% to 123.6% in Portugal, 40.2% to 84.2% in Spain, and 44.5% to 117.6% in Ireland (Appendix, Tables 1, 2, 3). The Maastricht Treaty, however, states that national public debt must not exceed 60% of GDP. The unemployment rates have being increasing from 2008 to 2012 and have reached 27% (youth unemployment almost 64%), 17% (youth un. reaching 50%), 27.2% (youth un. - 57%), 14.3% (youth un. – 30.3%) respectively. The total number of unemployed people, out of 27 countries, reaches 26 million (12.1%). Such a big rate of unemployment can have very negative consequences in the future: high unemployment means low demand for goods, which creates in turn a decrease in production and further unemployment. The growing number of people out of jobs, and people in work experiencing wage cuts, directly leads to even smaller tax payments, making it impossible for governments to reach steady budget growth. Frustration, despair, tiredness, depression are filling people, resulting in multiple violent protests, demonstrations, and great opposition against Austerity. People are leaving their countries in hope to find a job somewhere else. For example, in Portugal almost 27 per cent of young people have migrated to such countries as Germany and the UK. The cuts of €3.5-billion on government spending for healthcare, education, and social security in the current year [2013] will only intense the Portuguese crisis.
Since people’s buying power has significantly decreased, prices have dropped, resulting in the deflation, which is a dangerous indicator for the economy. The inflation rate dropped in March from 1.7% to 1.2%. Even though the ECB has decreased the rate to 0.5 (from 0.75) the optimistic expectations are not being shown either: the results of such an action will not be visible because even under this rate the middle-sized businesses in Southern countries face difficulties to loan anything due to their low creditworthiness. If it will help deflation stop is still under the question.
The Austerity policies are not ending on these four mentioned above countries. For example, Italy is protesting today against Austerity policies, facing now rising unemployment (11.2%), debt (127% to GDP) and low investor confidence. The economic situation in France is worsening as well, reaching 3.2 million unemployed people and increasing governmental debt of 90.2% to GDP.

Inequality has to be addressed
The United Kingdom is another good example of failing austerity policies to handle the crisis. The UK is considered to be one of the strongest world’s economies and even such an economy is failing to meet economic objectives starting with austerity programs in 2010. Since this year country’s GDP has been steadily falling. For the last 18 years the UK faces the biggest unemployment rate that increased in 2011 even faster compared to the whole Eurozone. Women suffered more because female employment in public sector is higher and the benefits for children and tax credits have been significantly decreased. The unemployment rate for women has never been so high since the 1980s and unemployment benefits and pensions have also fallen. Another problem that has to be addressed, beside GDP and unemployment, is the redistribution of income and increasing inequality. In the article “Austerity is not working: there is an alternative” the author raises another problem of unequal redistribution of income and increasing inequality in the UK, which is also caused by austerity policies. The author says that “average pay for the top directors of Britain’s biggest companies has increased by an eye-watering 49% in the past year alone” . The British government has cut both income and corporation taxes for people who earn more, when poorer people are being cut on payments and pensions. A part of the public sector has also been privatized by multinational companies, which led to higher prices in electricity, gas, telecommunications and public transport. All this directly affected inequality which rate has never been so high since the 1930s. The social security has significantly fallen which has its own and not small financial costs.

European Disunion
From these figures it is becoming clear that austerity policies are not of great help to handle the crisis; they are plunging countries into greater depressions. The tendency to blame rich Northern countries for such outcome has become very popular among people. The Austerity policies were mostly supported by German government. It seems to many people that at a time when some countries are falling into recession, some other countries seem to benefit from this crisis. Throughout the crisis, Germany has got good indicators of economic stability compared to other Eurozone members. Their unemployment rate is decreasing, reaching 5.4 percent, GDP rose by 3 % when the rest of the Eurogroup got 5.3 per cent contraction, and the banking elite have been handsomely profiting from it, observing huge amounts of fund flows from investors, who are more certain in German financial market. It seems that the money is going into the opposite direction; the most needed countries are dying from capital shortage. People are appealing to changes in such policies, make them less hard, give people the money to consume and satisfy their primary needs. However, the European Commission with the support of German Government are not going to change their current policies, and even more, believe that “paying off the debts is the necessary prerequisite to the economic growth” (Global Research, 2013). Such an outcome is leading to increasing disunion between the South and North, the periphery and the centre. Many people become more skeptical of the future existence of the European Union; the criticism of northern countries and general distrust are increasing. The author of the article believes that such policies are deepening the recession and increasing the gulf between European economies. The German government is strongly criticized in its helplessness and disinterest in helping southern countries. There is a belief in creating a new European banking Union, which would make Germany subsidize lagging behind southern economies. There are thousands of articles that call upon Germany to help these countries exit the crisis. These articles criticize austerity and Germany, blaming them for the worsened crisis and millions of people who have lost their jobs. Some of the articles are hostile and aggressive, threatening with the collapse of European Union and strong European bonds among the countries. Till now Germany does not accept the idea that austerity might be self-defeating and still shares the opinion that the crisis in all these economies is the responsibility of Eurozone member states.

Conclusion
In general, the article written by Stefan Steinberg seems to be very interesting, but one sided at looking at the problem. There are hundreds of such articles that criticize austerity as a false direction to economic growth, and blaming primarily Germany for forcing governments to run such policies. The crisis itself is such a complex and hard thing to get out of, and there is no easy way out. Getting out of the crisis is a tough and long - term process; trade-offs have to be admitted. What we see today is, of course, not the right direction out of the crisis, but there has never been the right one. Even though Austerity has failed, it still preserves the economies from having to rely on lots of extra money, which is a helping tool in the short-term but then forces economies to fall into even worse and long-term recessions. The best examples are the USA and the UK in 2008, and Japan in 2001, when the countries adopted quantitative easing. In the UK, for example, the circulation rate of money in the economy collapsed leading to a prolonged recession. Austerity policies are still a good fiscal tightening tool to reduce budget deficits when having increasing sovereign debts. They might have positive effects on the economy by preventing macroeconomic instability. Austerity policies can be efficient when the economy is not prone to fail so far as it did by many European countries, but at the current point of time, more supportive tools should be used. Jared Bernstein, an American economist, says that “the time for austerity is when the economy is strong and growing. When it’s stuck in the mud, austerity just digs it deeper.” Laying off so many public servants contributes to higher unemployment and less tax collections. Freezing pay and high unemployment result in less spending, which affects the private sector and further production. Of course, all this leads to less production output, which means lower GDP and thus increases the unemployment rate. It appears to be a vicious circle. Cutting public programs increase poverty and inequality in society, especially when the economy is already in a dangerous recession. Privatization of public state assets does not promise its effective relocation and future effective functioning because some services have to be still supplied by the government in order to avoid private companies charging higher prices. By now the Austerity policies in Europe are called to be absurd and a pointless vicious circle that prevents countries from economic growth.

Criticizing and putting blame for the crisis on someone is also not a good way out. Let us take into consideration that Germany was not the reason for the collapse that happened in 2008. Despite the fact that the EU’s group members have the same indicators for measuring their economies, they still run their economies differently. Germany is mostly criticized and, therefore, many countries demand help with subsidizing the Southern countries. It seems unrealistic that one country can handle this crisis on its own, just giving out money, and why German citizens should pay for the debts of others, for the wrong decisions and directions of other countries running national economies. Would it be fair for German people to give out their own money without a hope of seeing a return on their investment? Many people can say that the European Union is based on the cooperation and bonds among countries but let us not forget the main reason for the creation of such a union: free movement of goods, people and capital. The cultures stay diverse and the ways of running economies differ.
One can definitely say that help and cooperation are definitely required among countries to overcome the crisis. The fiscal austerity policies should be reconsidered, changed, considerably softened, or even tailored specifically for each country, satisfying economies’ peculiarities, for example, giving more time to countries to meet their fiscal targets, cutting deficits gradually, which means less time pressure and realistic government spending cuts. The public sector is not to blame for the crisis, so why should the public sector suffer first? Countries which are suffering economically should not only complain and wait for help, but also reconsider reforming their taxation and spending systems so that they can avoid such financial recession in the future.
By now there are no alternatives to austerity policies, no concrete answers on how to deal with this complex crisis, but there is still a great hope that the European Union will go its second way: it will go through changes and adaptations, and will be even more powerful, liberal and independent after dealing with the crisis.