MacroScope

“There are human beings involved” in austerity debate

May 3, 2012

The inventors of democracy and its greatest 18th century champions both go to the polls this weekend. Greek and French voters will try to elect governments they hope will help release their economies from the grips of the euro zone debt crisis.

While exercising their democratic vote, Europeans will also be contemplating another key issue: their basic economic survival.

That is why the debate about austerity versus growth has become so important.

Financial markets see fiscal discipline as crucial to get the euro zone’s debt burden back to sustainable levels. They are going into the Greek elections favoring triple-A rated bonds over peripheral counterparts.

The premium investors require to hold French debt over German Bunds has also risen in the run-up to the French vote as Francois Hollande became the favourite to win.

But as economies fall deeper into recession and double-digit unemployment hurts prospects for growth, the view that austerity alone will not solve the euro zone debt crisis, seems to be gradually winning over some investors in the bond market – the heart of the crisis.

Sanjay Joshi, head of fixed income at London and Capital, says:

There is a gap between reality and the utopian policies that Brussles is coming out with: you cut by x percent and everything will be fine, the markets will open up and you will be OK. It doesn’t work like that because there are human beings involved and people are suffering.

Only a handful of economies in the 17-member euro zone are still growing and the currency bloc as a whole is expected to languish in a mild recession until the third quarter of this year, a Reuters poll showed last month.

Unemployment in the euro zone rose to a 15-year high of 10.9 percent in March. For Spain, it hit 24.1 percent that month, a level not seen in euro zone data stretching back to 1986. Greece’s unemployment rate was nearly 22 percent in January.

For Ryan Avent at The Economist, that’s enough to officially begin calling the episode a depression.

Elisabeth Afseth, fixed income analyst at Investec says:

It is a huge issue, the (fiscal) tightening that is happening in Europe. Obviously they need to improve budget deficits and (so on), it’s not as if they can get away without it, but it’s the sole focus on that which is the problem.

That is why some are holding out hope for French front-runner Francois Hollande, who last week welcomed Germany’s call for growth measures as a sign that Europe was accepting his warning of the risk of austerity.

London and Capital’s Joshi says:

The good news for Greece could be that if Hollande does win in France that it may well change the emphasis in terms of the policy prescription that is coming out of Europe towards more growth-oriented policies which could be a silver-lining for not only Greece, but for many peripheral countries.

The main goal is to get euro zone economies growing again. For that, you need investment. According to Athanasios Ladopoulos, founding partner of Swiss Investment Managers:

What is positive for the markets is if these governments find a way, with the support of external sources, to invest in their own economies. It’s not a magic formula, it’s simple things: more investment, more employment, more salaries, more taxes, more spending, more growth for the economy.

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