Fiscal profligacy did not cause the sovereign debt crisis engulfing Europe, and fiscal austerity will not solve it. On the contrary, such austerity has aggravated the crisis and now threatens to bring down the euro and throw the global economy into another tailspin.
In 2007, Spain and Ireland were models of fiscal rectitude, with far lower debt-to-GDP ratios than Germany had. Investors were not worried about default risk on Spanish or Irish sovereign debt, or about Italy's chronically large sovereign debt. Indeed, Italy boasted the lowest deficit-to-GDP ratio in the eurozone, and the Italian government had no problem refinancing at attractive interest rates. Even Greece, despite its rapidly eroding competitiveness and increasingly unsustainable fiscal path, could attract the capital that it needed.
Deluded by the convergence of bond yields that followed the euro's launch, investors fed a decade-long private-sector credit boom in Europe's less developed periphery countries, and failed to recognize real-estate bubbles in Spain and Ireland, and Greece's slide into insolvency. When growth slowed sharply and credit flows collapsed in the wake of the Great Recession, budget revenues plummeted, governments were forced to socialise private-sector liabilities, and fiscal deficits and debt soared.
With the exception of Greece, the deterioration in public finances was a symptom of the crisis, not its cause. Moreover, the deterioration was predictable: history shows that the real stock of government debt explodes in the wake of recessions caused by financial crises.
But austerity is not working; indeed, it is counterproductive. In the short to medium term, fiscal consolidation – whether in the form of cutting government spending or increasing revenues – results in lower output and employment, which means lower tax collection, higher deficits, and escalating debt relative to GDP. Savvy investors, like frustrated voters, recognize that low growth and high unemployment actually enlarge deficits and add to debt in the short run. That is why, after more than two years, interest rates are rising, not falling, in countries crushed by onerous austerity measures.
Greece is caught in a classic debt trap, as the interest rate on its public debt has soared beyond its growth rate by a considerable margin; Spain is teetering on the brink. Austerity in Europe has confirmed the International Monetary Fund's warning that overdoing fiscal consolidation weakens economic activity, undermines market confidence, and diminishes popular support for adjustment.
In the long run, many eurozone countries, including Germany, require fiscal consolidation in order to stabilise and reduce their debt-to-GDP ratios. But the process should be gradual and backloaded – with much of the consolidation coming after Europe's economies have returned to a sustainable growth path.
Italian prime minister Mario Monti and French president François Hollande are right: Europe needs bold, co-ordinated policies to promote growth, along with market-based structural reforms to foster competition and an easing of fiscal targets until output and employment recover.
But how can significant new growth initiatives be financed? The reality is that the rest of Europe cannot succeed in restoring growth without Germany, and Germany remains wedded to the austerity cure.
With a modest fiscal deficit, record-low borrowing costs, and a huge current-account surplus, Germany has the financial firepower to unleash a significant stimulus.
Despite pleas from the IMF and the OECD, Germany also remains implacably opposed to eurobonds, which could ease the funding constraints of other eurozone members and bolster the resources of the European Stability Mechanism, which currently does not provide a credible firewall against a run on Spanish or Italian sovereign debt – or on the European banks that hold it. Indeed, the worsening banking crisis, with deposits fleeing from the eurozone periphery, is further strangling Europe's growth prospects.
It is probably too late to save Greece. But a shift toward policies to promote growth, supported by the easing of deficit targets and the issuance of eurobonds, is essential to bring Europe back from the brink of sustained recession, to stabilise Europe's financial markets, and to prevent another significant disruption to global capital markets.
Bye!
Fil
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Fonte: Theguardian
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