Is Austerity The Biggest Threat To The Euro?

The eurozone economy has been contracting for six consecutive quarters and its unemployment rate is at 12.1%.  Core economies such as France and Italy have rising unemployment and even Germany has been experiencing slower economic growth.  Austerity measures have been used to save the euro but those policies may be the biggest threat to the euro.  The ECB has not been able to use stimulative monetary policies that have been used by the Fed and the EZ Stability and Growth Pact requires core economies like France and Italy to hold their debt to GDP ratios to 3%.  Consequently, fiscal policies are not available to compensate for the absence of an aggressive monetary policy.

It is easy to forget that the problems in the EZ in most of the member states were not caused by public sector profligacy.  Bad debts in the banking sector were shifted onto public sector balance sheets.  Private sector profligacy is the root cause of the economic problems in most of the EZ nations.

The push for austerity in the EZ has different roots than those in the US.  The GOP has been pushing austerity in order to attack social welfare programs.  That has not motivated austerity in the EZ.  It has been motivated by the mistaken idea that the troubled economies can export their way out of difficulty.  That of course is impossible.  Current account surpluses and deficits must sum up to zero.

The failures of austerity in the EZ goes beyond the bland statistics of negative GDP growth.  It has been a human calamity could have been avoided.  Social mobility has been impaired in many of the affected states by the use of austerity measures.  Future generations will pay the price for what is happening today.