Is there a better way out of the European debt crisis than austerity?
Given the extent and severity of the economic problems facing many countries today, austerity may be the only viable solution to today’s economic problems, despite its flaws. The undisputed optimal method for a debtor country is in fact to relieve its debt is to grow economically, so that tax revenue becomes sufficient to pay debt off. This option is unusable however when a country must borrow more money to merely service its debt and pay administration costs, which is a scenario seen widely today. This issue of mismanagement, coupled with the global recession that began in 2008, made the option of growth nigh on impossible to pursue for many nations. As a result, austerity may be the method that many nations have no choice but to use. Over the last year, France, Spain and Italy succeeded in cutting their budget deficits with the policy of austerity. The IMF said on January 24th 2012 that it expected these deficits to be further reduced this year thanks to the continuation of this policy. This evidence indicates that austerity can indeed function as a solution to deficit reduction, which in turn can reduce other economic problems, such as unemployment, which result from the debt. However, it is the way in which austerity is imposed that determines its success. An important factor to consider is the severity of austerity measures, or the pace at which debt is reduced. Carlo Cottarelli and Laura Jaramillo of the International Monetary Fund are of the opinion that trying to cut the deficit over-aggressively will have a negative impact on growth, and therefore a rise in the cost of debt service would lead to a higher as opposed to lowered debt-to-GDP ratio. As a result, they advise caution in how heavily austerity measures are imposed. In the same vein, the IMF has urged many countries (of those who can still choose not to press austerity) to ease up on austerity measures and not press...
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