Euro Debt Driven by Austerity

Market Trends - 22/07/2015

Many great economic minds have lectured on the idea that implementing austerity measures is not an effective long-term solution for governments that are having trouble managing expenditures or debt. Austerity may not only fail to improve the health of an economy, it also might compound existing problems if conditions in the economy are already difficult. Today we see an excellent example of this latter happenstance, as the government debt in the Euro Area continues its ascension despite overwhelming calls for budget cuts. The austerity measures leading to this type of environment are meant to spur a pattern of deleveraging, but often do the opposite: expenditures weaken, the environment for investing gets stale, and the government actually takes in less in taxes due to a diminished tax base. Accordingly, there is no room for austerity measures in the book of modern economics. Economists affirm that now conditions are right to increase debt, as some of the lowest yields in a significant period are now available, dropping borrowing rates to opportunistic levels. Many countries with high interest rate debt would do well to add a healthy dose of fiscal stimulus to a current borrowing endeavor, thereby pushing the economy in the right direction.

The Maastricht Treaty serves as an obstacle in the road however, preventing some vulnerable sovereign countries from assuaging their debt problems. The only option that some governments can see is more austerity-driven borrowing instead of paying their bills. Austerity will work given special circumstances, but it isn’t for most. The latest measures in Greece have shown that further relief efforts have failed to help alleviate debt problems, with the small nation’s debt-to-GDP ratio growing from 168% to almost 200% with the latest bailout. It has become evident that austerity measures in this region will be a major factor behind European economic health as a whole.


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