For more than two years, European leaders have pushed a cocktail of fiscal austerity and structural reforms on troubled countries like Portugal, Spain and Italy, promising that it will be the tonic to cure their economic and financial ailments. All the evidence shows that this bitter medicine is killing the patient.
Portugal’s highest court recently ruled against cuts to the wages and pensions of government employees. Protesters in Spain have picketed the homes of lawmakers to demand better treatment of homeowners behind on their mortgages. And frustrated Italians cast such a large vote for an anti-establishment movement that the country still does not have a new government more than a month after its national elections.
From the beginning, it was clear that economic austerity (cutting government spending and public benefits) and structural reforms (relaxing tough labor laws and privatizing state-owned companies, for example) could not be accomplished simultaneously during a deep recession. And that painful reality is playing out with no end in sight.
In Portugal, the government of Prime Minister Pedro Passos Coelho cut spending and raised taxes so much that the fiscal deficit has fallen by about a third from 2010 to 2012. He also pushed through reforms to phase out rent control for tenants and legal changes that make it easier for companies to fire workers. The result is that the country’s unemployment rate has risen to close to 18 percent, from 12.7 percent in 2011. Economists say Portugal will likely have a bigger fiscal deficit this year than it agreed to in exchange for loans from other European countries and the International Monetary Fund, because national policies, not surprisingly, have made the recession deeper than anticipated.
Portugal and other European countries, in the longer term, will need to reduce their deficits and reform policies that have held their economies back for decades. But, for now, this approach, beyond fostering economic disaster, has created widespread public anger and resistance aimed at domestic politicians.
The biggest political beneficiaries have been groups like the Five Star Movement in Italy, which has refused to support any political party in forming a government and has called for a referendum on the country’s use of the euro. The real danger for Europe is that such movements will increase and voters and leaders in struggling countries will see less and less value in sticking with the euro. If countries start ditching the currency, it would cause widespread panic across the Continent and tens of billions of dollars in losses to governments, banks and investors in Germany and other richer European countries, not to mention in the rest of the world.
What would help is if leaders like Chancellor Angela Merkel of Germany stopped insisting on austerity and helped bolster demand by, for instance, allowing weaker countries to issue bonds backed by the euro zone. That could put more into the economies and help lift them out of a downward spiral. Policy makers in Portugal and Italy would have a much easier time selling their people on the need for reforms if they weren’t also cutting popular government programs and benefits. Faster growth and lower unemployment would provide the resources that could later be used to pay down debts and reduce deficits.
European leaders will find it difficult to admit that their approach is failing. But they should realize that staying on the current path is undermining public confidence in the euro and the larger European project. If they let those forces gather strength, everybody on the Continent, not just the Portuguese or the Italians, will be worse off.
Fonte: NY Times