EU in a 'catch-22 situation' on debt, US economist says
ISTANBUL - Hürriyet Daily News | 6/23/2010 12:00:00 AM | XI CHEN
Austerity plans are not the answer to Europe's much-debated sovereign debt crisis, the co-director of an American economic think tank has said.
Austerity plans are not the answer to Europe’s much-debated sovereign debt crisis, the co-director of an American economic think tank has said.
“Pro-cyclical policies will make things worse,” Mark Weisbrot, the co-director of the Washington, D.C.-based Center for Economic and Policy Research, told the Hürriyet Daily News & Economic Review in an interview Monday.
Pro-cyclical policies are economic policies that follow the business cycle, expanding in boom times and retracting in gloomy ones.
Europe’s pro-cyclical austerity plan, which Germany, France, Italy, Spain, Portugal, Greece and Ireland pushed through in the aftermath of the Greek crisis, entails reducing budget deficits through cutting public-sector pay and freezing pensions as well as pushing labor reforms and raising the retirement age. The measures have caused negative reactions in some countries, with thousands of workers taking to the streets to protest deteriorating living standards.
“For the majority of the people, it is for the worse,” Weisbrot said. “The EU is more concerned about punishment of weaker countries and taking advantage of the situation to implement reforms to give some players more power.”
Weisbrot said he believes policy makers are using the crisis as a chance to change the economic framework and the economy is being put at risk in order to “accomplish political objectives.”
[HH] Liquidation of the welfare state
The economist also expressed concerns about the redistribution of income and the erosion of social welfare in some of the debt-laden European countries. He suggested that the EU could use expansionary policies similar to those the United States has enacted to get back on the path of economic growth. “The EU needs to switch to a more coherent policy to make up for the differences in productivity among countries,” Weisbrot said.
With financial markets betting against the euro and the solvency prospects of some European countries, Weisbrot said he believes markets are not long-term oriented and the EU has the capacity and resources to help the weaker economies in the bloc.
However, he said he cannot specify clearly how growth will come back to Europe after fiscal and monetary expansions, which could translate into more debt, or even worse, another asset bubble.
Regarding Turkey, Weisbrot said the country should diversify its integration options, as “there is no point in putting all eggs in one basket,” referring to the EU.
As the euro debt crisis continues to unfold, there are increasingly diverging opinions on the appropriate policy measures to take and the right timing to implement them. Some European analysts believe taming budget deficits is the most urgent priority while others believe such a policy, if implemented right now, would choke economic recovery.
In short, Europe seems to be falling into a catch-22 situation: to reduce debt, it might need to kill off growth, and to renew growth, it might just need more debt.