Mired In Recession, EU Eases Some Austerity Measures

Transcript

(SOUNDBITE OF MUSIC)

RENEE MONTAGNE, HOST:

This is MORNING EDITION from NPR News. I'm Renee Montagne.

While there are many signs that the American economy is picking up steam, in much of the European Union, the opposite is true. Austerity programs aimed at reducing national debts have been blamed for crushing growth and sending unemployment in the eurozone nations to a record high of 12 percent.

This week, the EU announced it is easing up on austerity, giving some countries - including Spain and France - more time to hit their deficit reduction targets.

NPR's John Ydstie takes a closer look at whether the big dose of austerity was the wrong medicine for Europe.

JOHN YDSTIE, BYLINE: Faced with the debacle in Greece and fear that it could spread across Europe, eurozone policymakers decided three years ago to pressure Greece and other countries with big debt loads, to cut their budgets and raise taxes to get their debt under control.

Policymakers claimed the government austerity would give the private sector more confidence to invest and hire, so the economic drag from the budget cuts wouldn't be so bad. They were wrong, says Jacob Kirkegaard of the Peterson Institute for International Economics.

JACOB KIRKEGAARD: There's no doubt that the European policymakers oversold austerity in the sense that they underestimated the negative effects.

YDSTIE: Negative effects like a long recession, debt loads increasing instead of falling and youth unemployment running between 25 and 50 percent.

JOHN MAKIN: Austerity is going out of fashion very rapidly.

YDSTIE: That's economist John Makin, a fellow at the American Enterprise Institute.

MAKIN: The miscalculation was to say well, you know, we can't given Spain any loans, we can't give Greece any loans unless we make them increase taxes and cut spending. But that's sort of saying we're not going give you a loan unless you really put your economy into a recession and that just doesn't work.

YDSTIE: Makin says the Keynesian economists were right. Government policy needs to be stimulative in a recession.

But the EU policymakers are not admitting mistakes. Ollie Rehn, the EU's top financial official, says that the austere budgeting worked. He says it stabilized financial markets, and gave investors the confidence to buy Spanish and Italian bonds.

Adam Posen, head of the Peterson Institute for International Economics, says that's just spin.

ADAM POSEN: What changed the game was the that ECB - the European Central Bank - with German backing said they would do whatever it takes and that's what changed the bond markets - nothing to do with the budget.

YDSTIE: Posen sat on the Bank of England's interest rate setting board during the crisis. He says the European austerity was excessive and badly timed.

The AEI's John Makin says the ECB should have been even more aggressive, and like the Federal Reserve, flooded the economy with cash. That would have lowered the value of the euro, he says, and kept the struggling economies more competitive allowing them to grow more. But there were political barriers to that, among them Germany's deep fear of inflation.

Jacob Kirkegaard says Europe's austerity was flawed in a number of ways, but he argues, Europe didn't have many alternatives, because most of the troubled countries couldn't increase government spending since the bond market wouldn't have lent them the money to do it.

KIRKEGAARD: I don't think that a credible alternative has really been offered.

YDSTIE: In the end, Kirkegaard thinks Europe's austerity has been successful at stabilizing the financial markets.

KIRKEGAARD: But the costs associated with it have certainly been tremendous.

YDSTIE: Adam Posen says there still aren't any great alternatives for Europe right now, but he says the episode does offer one lesson.

POSEN: You can have a situation that's very bad and politically divisive and have it persist for a very long time without the system breaking up. And unfortunately, I think that that's where the euro area is going to be for the next few years. It's not going to recover in any meaningful sense. It's not going to get some huge burst of confidence or employment, but it will hang together in a pretty miserable state.

YDSTIE: John Ydstie, NPR News, Washington. Transcript provided by NPR, Copyright NPR.