An annual economic forecast released by the European Commission on Friday says that Spain, Greece and Portugal, already entangled in a deep crisis, are going to see things grow worse this year. The biggest problem is going to be unemployment. Joblessness in both Spain and Greece, where a quarter of the populations are currently unemployed and the share of jobless young people exceeds 50 percent, are expected to rise to 27 percent.
Economists say that the current crisis is comparable to the economic crisis in the 1930s. Back then, leaders reacted by cutting spending to bring budgets into balance. The result? The austerity policies proved a complete disaster. By cutting government spending while business and consumer spending were falling, those governments restricted economic activity. As a result, unemployment continued to soar and disillusioned people in some countries like Germany turned to extremism.
Instead of learning the necessary lessons from the past, our current leaders are repeating the same mistakes by putting their trust in spending cuts. They are refusing to draw lessons from others’ experiences too, like for example, that of Franklin Roosevelt, whose public investments in jobs and defence turned the US economy around. Also, many economists all over the world have been shouting that the solution to depression is boosting demand, not killing demand.
Austerity measures, if not corrected, will have deep disastrous political consequences. As in the past, despair about the economic pain is driving people to bizarre extremes. Many Italian voters voted this week for the anti-austerity party of a professional comedian. In Spain, a movement for Catalonian separatism is gathering speed. In Greece, a racist, fascist party has won several seats in the parliament and was even expected to capture power, to the horror of many European leaders. Britain too is suffering from the negative consequences of austerity. Since Prime Minister David Cameron came to power in 2010, Britons have been punished with austerity to bring its budget into balance. What happened was that the economy worsened. Last week, Moody’s stripped the country of its AAA credit rating. The rate cut should serve as a lesson against austerity. But changing policies would require a fundamental change in thinking. European leaders and pro-government economists must revisit their policies, look at the results and take a decision to prevent more disasters. Leaders like German Chancellor Angela Merkel have been especially adamant, and have been castigated for their obstinacy.
Curbing austerity would require release of more funds to boost or sustain demand. For crisis-hit countries, that means donors have to release more funds. For that to happen, the world needs to exert more pressure, and the media must speak more vociferously against the perils of austerity.•