It has become conventional wisdom to blame austerity for the huge growth gap, rocketing unemployment and other related evils many European economies suffer from. While trimming down deficits does little to alleviate the downward pressure, the main driving force in the current recession remains the balance adjustment the private sector is undergoing. Companies and individuals are undertaking a vast deleverage, reducing investments and expenditure across-the-board. No wonder credit is falling for all the efforts to inject massive liquidity, business expansion plans are shelved and overall demand is plummeting.
If we were confronted with a short-lived crisis, indulging in hefty public imbalances might help to bridge the expenditure gap. The ensuing pick-up would ensure a quick reduction of the debt levels dispelling any doubt on public finances’ sustainability. But mending the shortcomings and excesses built up during the boom years, is likely to become a long term endeavour. Thus, big deficits largely prove of limited help in feeding an up-front recovery.
For all the much heralded austerity, delivery has proved in most cases less severe than what most people tend to think. Cuts and tax rises cannot be considered by all means as negligible. Bur their real impact on disposable incomes does amount to a rather modest share, on average. Daunting unemployment in many vulnerable economies is more closely linked to the severe drop in production than to policy-making. Additional doses of flexibility in the labour market undoubtedly lead to accelerate lay-offs, as the Spanish experience shows. But the root problem lies in the grim outlook most enterprises face.
By imposing tough budgetary targets,Europe is contributing to transform public accounts rebalancing into a loathsome exercise. As the medicine fails to bring about any tangible improvement, austerity is mercilessly pilloried as the main culprit for the current disarray. In fact, deficits exert far less influence than Brussels bureaucrats believe. The deep recession is the one to blame and no matter the degree of public imbalances, dim perspectives are likely to remain hardly unchanged. The drive for balance largely stems from the acute shortcomings the Euro zone is confronted with, laden with asymmetries and a subdued solidarity incompatible with the smooth running of an integrated economic area.
Only a forceful push by the monetary policy, the only common one Europe has at hand, can save the day and revert the current trend.