PHOTO COURTESY : FILIPPO MONTEFORTE / AFP By Lucas Juan Manuel Alonso Alonso Contributing Writer, IndraStra Global Austerity P...
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| PHOTO COURTESY : FILIPPO MONTEFORTE / AFP |
By Lucas Juan Manuel Alonso Alonso
Contributing Writer, IndraStra Global
Austerity Policy: Social Costs and
Achievements
Is it possible
for European Mediterranean countries -considering the current and projected economic growth- to pay interest
and debt amortization and, if so, at which cost? It would be interesting to be given a true
answer to that key question.
The EU implemented painful austerity measures to reduce the high level of government debt in many member states. But it was, and still is, a wrongly-conceived
austerity. In fact, despite
years of austerity, in various European Mediterranean countries -for
example, Greece, Portugal and Spain- the debt to GDP ratio was going onto a
firm upward trajectory creating a possible risk of default-the current
situation in Greece is a good case in point-.
In addition,
austerity measures have contributed
to higher unemployment rates or, at best, with only
cyclical and insignificant downward variations, greater social inequalities, greater
tax burden on households meanwhile multinational companies quoted on the stock
market and great fortunes have less fiscal pressure, drop in consumer spending
-less purchasing power due to low wages and higher taxes-, precarious and poorly-paid
work, reduction of social security contributions, drastic spending cuts in core government functions
such as education, research & development, health… These negative effects, arising from the application
of austerity measures, lead EU to
economic stagnation. Therefore, what have
been the real successes of austerity policy?
Paradoxically, in
some euro zone countries with chronic
crises, non-development expenditures increased throughout these years of
austerity -for example tremendous public structures which are intended to place
people related to political, economic groups...., wasteful of public funds
brought about by governments on opaque contracts...and others unproductive
public structures- while, at the same time, development expenditures and social
assistance are falling drastically -for
example education, research & development and healthcare-.
“Thus, as the result of policy implications,
the budget cuts are not being carried out on the necessary items and there is a
significant level of government debt that is useless for the productive
economy”
When, where, and how the government invests its resources are core questions of public policy. The government revenues can be
invested in development or non-development projects. Development projects are productive and,
therefore, they are the ones who boost a country's socio-economic progress. On the contrary, non-development projects are
a charge on a government budget.
Greece Situation: Is there a possible solution?
Currently, Greece is underway for a possible link the interest on government debt to GDP
growth. That allows the government the opportunity to make
lower payments to creditors throughout rough economic periods and higher compensatory
payments in buoyant times. I say
compensatory payments because, as a result of this approach, public debt
issuers (borrowers) transfer credit risk to lenders, therefore it is expected creditors
(lenders or investors in debt) would demand higher interest (supplementing
premium) in return.
Precisely the transfer of risk and premium makes this framework of public
debt management particularly original and uncommon.
Do Mediterranean countries have the
necessary competitive economic sectors to develop enough sustainable GDP growth
to justify the use of this framework of public debt management? I don’t think so. Mediterranean
countries need to promote
sustainable economic development and for that purpose they need to
create and/or strengthen core productive
sectors, fostering new start-ups and innovative
projects rather than competitiveness based only on
tourism/construction. Austerity measures
and low-paid employment are no miracle cure to the current socio-economic
situation.
“Unemployment is worse than create
low wage jobs” is a constantly-repeated mantra within the
European Union. But,
in my view, such a situation can be an option in a few very specific cases,
only for short periods of time, and in economies in transition and can never,
therefore, be a variable to formulate long-term economic policy. Wages must be worthy to improving the living
conditions of the people because this fact will lead to the creation of middle
classes which would strengthen purchasing power and domestic business
structures. EU should compete through the quality and added value in differentiated products rather than trying to gain competitiveness through a strategy of low wages.
The Euro is in danger of
losing global confidence
Eurozone's
citizens had to ask themselves what were the advantages they gained since they
came into the Euro currency. While respecting
all opinions voiced, I think that European policy-makers have made the Euro
area seem to be an experiment in process rather
than a strong socio-economic union based on socio-cultural diversity. Let’s
take, for example, Euro currency: How it is possible to understand that a
currency backed by the central banks of the Euro zone depreciated so much and
so fast against the U.S. dollar influenced by the current Greek situation (even considering the fact that Greece
could exit from the Euro)? The answer is, in my view, a result of
disorganization and lack of true leadership in the Euro area. Quantitative Easing was very necessary around one
and a half year ago, when the exchange rate was about U$S 1, 38 per Euro
straining the socio-economic situation in the Euro area, now it is
a big mistake which be extremely damaging to the Euro zone. It helps little to exports because they reached maximum levels and lead to
more expensive imports needed to support domestic economy/SMEs. Additionally, it devalues
household savings and encourages dollarization of the European economy putting
the Euro in danger of losing global confidence.
How it is possible to understand that the ECB carry out a Quantitative Easing at the
worst possible moment (since mid-December the euro continues to fall, Greece
troubles, and FED could raise the interest rates)? How it is possible to understand that the ECB
has held an overvalued euro with respect to the U.S. dollar practically since
its creation, and now it to drop to parity, or falls far below it, against the
U.S. dollar? What kind of monetary
policy management is this? I think, with
all respect, that ECB policy-makers have made the Euro looks like as an
experiment in progress rather than a currency.
European Mediterranean Countries
The socio-economic revitalization of the Eurozone’s Mediterranean countries should come from a combination of fiscal consolidation and other kind of structural reforms. Such as, for example:
1. Reduction of unproductive government expenditures and public structures
2. Implement real measures to prevent the creation of unproductive state structure and patronage networks
3. Effective measures to fight against fraud and tax evasion
4. Impose a progressive taxation and to reduce or prevent a greater tax burden on households, low-income families, severance pay, SMEs
5. Effective measures to reduce high unemployment rates, huge social inequalities, child poverty, and abject poverty
6. Effective measure to encourage core productive sectors because these are the main driver of economic growth rather than subsidize unprofitable areas. To foster real entrepreneurial spirit (genuine enterprises) and avoid enterprises/entrepreneurs arising from political clientelism (cronyism and patronage)
7. Effective measures to avoid excessive charges for banking services and bank loans to sectors more prone to economic bubbles
8. Effective policies promoting sustainable and equitable economic growth. Besides, it is necessary to be aware about which GDP components lead to economic growth, because a same amount of GDP does not mean identical situations
9. A fairer distribution of wealth. This is the most important factor for a country's well-being, because large social inequalities destroy a country's progress.
Some international bodies are forecasting significant growth in some Euro area countries but I think they are not taking into account the negative impact of the ECB's QE:
A. The advantage deriving from lower oil price is being negated by the abrupt depreciation of the Euro against the U.S. dollar
B. More expensive imports needed to support domestic economy/SMEs
C. A rise in prices of services and goods considered basic necessities. This situation is going to increase poverty (energy poverty, abject poverty)
D. Airlines buy the fuel months or years in advance, therefore, many European international airlines are now paying a higher price for fuel. This situation leads to more expensive air tickets and less tourist traffic
E. SMEs have debts denominated in U.S. dollars
All these facts will impact negatively on development prospects in the European Mediterranean countries.
