Counterparties: Suddenly no one likes austerity

April 24, 2012

If you believe today’s host of reports, there’s been a sudden transformation in Europe. More than two years into a sweeping austerity project, European leaders are reportedly rethinking the idea that budget cutbacks can magically fix the continent’s dreary economy.

The commentary today borders on the breathless. “From trading floors to polling stations to the streets of cities across Europe, the message appears increasingly to be that countries cannot cut their way to fiscal health. They need growth, too,” the NYT declares. Henry Blodget, for his part, has settled decades of scholarly debate: “IT’S OFFICIAL: Keynes Was Right”. At Zero Hedge, Peter Tchir, calls it “The Day Austerity Died.”

How’d we get here? In France, Socialist presidential challenger François Hollande has indicated he’ll challenge austerity; the Dutch government yesterday collapsed over economic reform; and tomorrow, we may learn that the UK is back in a recession. The latest Eurostat numbers, meanwhile, are troubling. Greece, Portugal and Spain significantly reduced their respective budget deficits in the last two years, without anything resembling strong economic growth. In a back-of-the-envelope calculation of the same figures, Paul Krugman estimates that “1 euro of austerity yields only about 0.4 euros of reduced deficit.”

Angela Merkel, austerity’s great champion, is already pushing back against the austerity backlash, arguing that the “credibility” of the eurozone is at risk without continuing cutbacks. But as Matt O’Brien wrote last week, the market isn’t just worried about budget credibility, it’s worried about Europe’s credibility as an engine of economic growth. Credibility, after all, comes after results.

EU Mess
Europe begins to revolt against Germany-prescribed austerity – NYT
Spain reaches target in short-term debt sale, but its rates soar – Reuters
The “pain in Spain” could hit the world economy – WashPost
The tale of banking in the land of Italia – FT Alphaville
“The above statement shows why austerity is simply one of the dumbest policies on the planet” – Bonddad Blog
Five things you can say in French elections but not in American ones – Wonkblog

Shiller: We could all be dead before we see a housing rebound – Reuters

Justice Department investigating criminal charges against Wal-Mart – Bloomberg

Ahead of IPO, Facebook sees a drop in both profit and revenue – WSJ

MF Doom
MF Global trustee says executives will not receive bonuses – Bloomberg

The Fed
Krugman: The economy needs Chairman Bernanke to act like Professor Bernanke – NYT

Too Big to Outperform
As mutual funds have grown, performance has declined – Smart Money

Diamond and Saez: Higher tax rates on the 1% wouldn’t slow growth – WSJ

For the first time in over 70 years, more Mexicans are leaving the U.S. than entering – WashPost

Recap: James Murdoch’s latest appearance before the Leveson inquiry – The Guardian

Jeremy Hunt emails: The timeline of the BSkyB takeover that wasn’t – The Guardian

Popular Myths
Let’s stop blaming homeowners for the housing bubble – FDL

So Hot Right Now
Banks are pushing junk bonds as Europe’s crisis continues – Bloomberg


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Wrong. No one has ever liked austerity, that’s how they got into this mess.

Posted by ARJTurgot2 | Report as abusive

It’s not as of Europe – particularly Greece, Italy, and to some extent France – were models of dynamic growth prior to austerity. Spain had a housing boom that temporarily covered up structural flaws in its economy, but it’s long had elevated unemployment rates.

Austerity at the moment may or may not be the right policy. What clearly are the right policies, though, are structural reforms of labor markets and regulatory reform to allow for flexibility and growth. Read the stories about how tough it is to fire employees in Italy, how Greece didn’t issue new trucking permits for decades, and how various markets are dominated by incumbents with guild-like protections from outsiders. Of course, Krugman doesn’t like to talk about these problems, which I guess somehow are supposed to be cured by the magic elixir of macroeconomic stimulus policies.

Posted by realist50 | Report as abusive

“as if”, not “as of”

Posted by realist50 | Report as abusive

Market-based economies are positive feedback systems – when things are going good, there is more investment, but when the economy weakens, investment dries up. If the government wants to dampen bubbles or limit depressions, it needs to inject negative feedback into the economy. When the economy is stalling, the worst thing you can do is reduce government spending, as that is the time it is needed most. Conversely, when the economy is growing, it would be acceptable to reduce spending, so that it doesn’t add to the bubble.

Cutting government spending during good times and increasing it during negative growth may sound counter-intuitive to some, but while austerity programs may have curtailed fiscal crises, they never ended recessions or depressions.

In a weak economy, an austerity policy will drive down asset values even more than a recession would, allowing for increased concentration of wealth, as those with the resources are able to accumulate more assets. It will not create any new jobs, nor lead to new investment – if that were the case, then all of the capital sitting in virtual mattresses would be getting deployed instead of earning no interest.

Posted by KenG_CA | Report as abusive

Germany needs to get the hell out of the EZ – they and everybody else will be the better when they do.

Posted by MrRFox | Report as abusive

Europe needs new demand to overcome this crisis. The central bank needs to circumvent the banking system and deal directly with the public in a non debt based system. This way liquidity doesnt get trapped and new stimulus doesnt add to the debt burden. For a more detailed explanation:

Posted by Dannyb2b | Report as abusive

KenG_CA, two counter-examples are Ireland now and UK under Thatcher. Easy to keep deficit spending when people are lending you money which they do until one day they don’t. Of course, Greece could have just collected the tax it was owed.

Posted by Danny_Black | Report as abusive

Although my title may have sounded that I was in favor of “Austerity Dying”, I don’t think “spending for growth” will work either. Ultimately, debt restructuring/leaving euro, with long term austerity is what it will take to get Europe out of this mess

Posted by TFMkts | Report as abusive

Ireland still has very high unemployment (>14%, higher than in 2009, the peak of the crisis). The UK under Thatcher was marked by increased unemployment and high (especially by today’s standards) inflation.

While fiscal and economic crises are often related, they are not the same. Creditors of debtor nations don’t care about economic problems of their borrowers, they just want their money, and they don’t want more of it printed.

Posted by KenG_CA | Report as abusive

KenG_CA, Thatcher inherited high inflation from the Labour government and it took the high interest rates and cuts to tame it. It was when the spending spigot was opened again that inflation shot up again. Also inflation was not “high by today’s standards”, from 82 to 88 it was more or less where it is now.

One only has to look at the train wreck of China to see what happens when you spend like crazy to “drive growth”

Posted by Danny_Black | Report as abusive

I wasn’t paying that much attention to inflation in the UK in the 80s, but when I googled it, it said it was about 5%, which is much higher than what we have now. And unemployment was high throughout her tenure.

I’m not familiar with the “train wreck” that you call China, but I don’t think the comparison is fair. What they had 10 years ago wasn’t an industrialized economy, and however bad you might think it is now, it’s far better than what they had. The standard of living for the average Chinese person has dramatically increased during their growth spurt, and before that, the lack of inflation was irrelevant to most people there, as they had little money anyway.

Posted by KenG_CA | Report as abusive

And if inflation is your only metric for a healthy economy, and unemployment is not as important, then we shouldn’t be having this discussion, as we have a fundamental difference about what is a healthy or weak economy.

Posted by KenG_CA | Report as abusive =ebrd%20austerity%20baltics&source=web&c d=1&ved=0CCIQFjAA&url=http%3A%2F%2Fwww.e cs%2Fescape-austerity.pdf&ei=LXWZT_XWBO_ P4QSa9KDFBg&usg=AFQjCNGIsEF3MlIfLc956QYp jlfUC6NiSA&cad=rja

Unemployment under Thatcher was mostly “hidden unemployment” becoming unhidden, ie people who had spent their lives doing non-jobs in the public sector or in heavily unionised private sector jobs losing those non-jobs. If you think those people should have been kept in their non-jobs at public sector expense then yes we do have a fundamental difference.

Posted by Danny_Black | Report as abusive

That may well be the case, but that doesn’t mean the economy was improved. A healthy economy would have found jobs for those people. You’re basically saying the deficits were masking a shortage of jobs, but the spending cuts did nothing to address the shortage.

Posted by KenG_CA | Report as abusive

Been all of a few months, wonder how they’ll like it a year from now!

Posted by mick68 | Report as abusive

You can fool all of the people some of the time.

But now that their money is gone and they’re starting to pay attention, every third article they read is explaining that austerity doesn’t END a recession; austerity CAUSES it.

Being poor and finding out that it’s because some greedy b’tards stole the economy and then being asked to give up some more is, finally, not going that well.

Posted by fionamacknz | Report as abusive

My dear Fi,
It is hard for these countries to look themselves in the face and find the one to blame. If their economy was truly undone by some greedy SOB – point him out. But aren’t we are told that the government will fix it when it was their incompetence and lack of financial acuity that got them in the trouble in the first place. So – do we double down on incompetence, government benefits, a social state and demand our fair share. In the end – life as usual cannot go on. This is the tough lessen families learn – countries learn. Watch as the lending dries up and the benefits fall short – and this whole thing unravels. I think what a lot of people with sense are saying – simply take care of your debts and get to the hard work of building your economy. The frustration shown here is they trusted their politicians and government and now they are shooting any messenger of austerity. However there is nowhere to pass this buck….Euro I mean…

Posted by xit007 | Report as abusive