What’s Austerity?

As the EU agrees to fund another bailout deal to help Greece rise from the ashes, providing them with another $8.7 billion in financial aid, the question that begs an answer is: will this have any effect on the austerity that is being imposed on the country. Throwing good money after bad? The condition that they get the money is that the coalition government impose further spending cuts on the population in a bid to bring their house in order. Talk about a poisoned present! You can have it, just as long as you impose austerity on the population. The EU should get rid of its present motto: ‘United in Diversity’. It’s more like: ‘You can have the money, I’ll stand back and watch, sadist that I am’.

Greek Austerity

Greek Austerity

Austerity! A severe and rigid economy coupled with the reduced availability of luxuries and consumer goods, refraining from worldly pleasures. We have really brought no-frills into the 21st century, haven’t we? We don’t just have no-frills airlines or no-frills travel; we have now taken that to a higher level: the no-frills economy and the no-frills state! Oh, except for of course those that are in power. They are rarely no-frills are they!

So, is austerity the answer and what is austerity anyhow, exactly?

Austerity

The objective of austerity is to bring spending in line with income in a country. But, perhaps it is also more than that. Its main objective is also to reduce the government deficit of the country.

But, it all depends on which side of the fence that you are sitting on. You could either believe that spending will spur the country on to spending in turn and thus boost the economy in that way (which is exactly what the US has decided to do by using Quantitative Easing). But, this will (if it works, that is!) have the effect of mechanically and mathematically reducing the debt, by increasing GDP. The debt will become a smaller percentage of GDP. We all know, however, that government spending can be far from efficient at times, and that theory is only based upon the success of spending. Spend incorrectly and it will do nothing except increase debt.

Austerity means cutting spending. Cut spending and your books will show that you have reduced the debt (debt as a percentage of GDP). But, that will be a short-term gain and long-term results will not necessarily increase growth in the country.

Increase taxation and the tax burden on the population is increased at an already economically-troubled time. Ask people to pay more will bring in money, but it will look like dimes, rather than dollars!

John Maynard Keynes

John Maynard Keynes

John Maynard Keynes believed that governments should step in and take action when unemployment was rising and people needed help stimulating the economy. Increasing employment would mean that debt would be reduced and Gross Domestic Product-growth would get stronger. Let’s take the example of the US here. The US government may be reducing unemployment if we look at the statistics on face value today. Between May and June 2013 figures show that there were 195, 000 jobs that were created. But, there is one statistic that reveals that those jobs may not last very long or are not permanent jobs of the highest quality. Gallup showed that the Bureau of Labor Statistics in the US wasn’t perhaps showing the true nature of those jobs that were created. Today 17.2% of the US workforce is underemployed. Admittedly, the figure is better than the 20.3% that was the peak of March 2010. But, the figure is still worrying and looks like it will remain so. The lowest figure reached was way back now in October 2012 (15.9%) and since then the number has continued to rise. That’s also despite the US’s Quantitative Easing (4) that should (so we are told) reduce unemployment and improve growth prospects. The US Bureau of Labor Statistics did also show an increase in part-time work from 28.5% to 29.3%. Some might argue that when the economy improves those part-time jobs will be transformed into full-time and permanent jobs. But, time will only tell. The figures are there to show however that at the present time people are underemployed and that’s despite the injection of $85 billion a month from the Federal Reserve.

Friedrich von Hayek

Friedrich von Hayek

Friedrich von Hayek was of the opposite belief: that standing in the way of free-market self-regulation would lead to a worsening of the problem. He believed that governments should cut spending and taxes and then the economy would regulate itself in the direction that it wished. The long-term result would then be an economy that was more robust. The governments would reduce their deficits and the economy would be better. US debt hasn’t seen that happen to it at all. US debt has steadily increased from the pre-Reagan era of 33% of GDP to Obama’s 105%, as the country edges closer to $17 trillion debt.

Effects of Austerity

There are possible three different types of effect that might be seen following austerity measures:

Economic

  • Austerity measures lead to consumption that can be classified as nothing better than depressed and there will be a fall in output of the economy.

Political

  • Social unrest will be created in the country. Greece saw thousands taking to the streets only yesterday again in another round of demonstrations. There have been four different governments in four years and today the coalition government is at breaking point.

Social

  • Due to austerity measures there has been a knock-on effect on everyday living of Greeks. Greece is today has the 33rd largest purchasing power parity in the world. It is the 13th economy in terms of per capita income in the EU27.

The troika of the European Union, the European Central Bank and the International Monetary Fund’s meddling in the affairs of Greece, imposing austerity in the hope that it will boost the economy seems like it will only be doomed to fail in the coming months and years. How could austerity, cuts and debt have the beneficial result of economic boom and prosperity? Even Hayek wouldn’t have believed that. It also seems impossible for anyone to attach a condition of austerity measures into the loan that is being made to Greece. The country has been bailed out so many times now in the past few years that whatever happens in Greece, they will have to do it again and again, and probably again.

$3.2 billion will come from the Eurozone rescue fund. $1.9 billion will be loaned by the European Central Bank. This will be made immediately, with another $643 million in October given from the rescue fund and the same amount in October by the European Central Bank. The international Monetary Fund will provide $2.3 billion. That makes a total of $8.7 billion.

Creditors have already warned Greece that they are behind schedule with the plans to privatize industries in the country. Only last month there was the failure of the sell-off of the gas company there, when Gazprom failed to make a bid for DEPA (the state-controlled gas supplier). DEPA has €500m of outstanding debt due to defaults on payments of bills by Greek customers. 25, 000 civil servants will have to see their salaries reduced also eventually to be redeployed or made redundant. This will add to the unemployment rate which currently stands at 27%.

Currently the situation of Greece is a combination of injecting money and austerity measures. In the event of one failing, let’s try both Keynes’ and Hayek’s theories on how to boost the economy. Greece looks so far down the road that neither looks very much like succeeding!

What do you think? Will the austerity measures combined with the bailout be the road to success?

About The Author

tothetick

Professional team of writers/analysts analyzing the financial markets.

Comment on Facebook

Leave A Response

* Denotes Required Field