CHAPTER 50 Greece and Eurozone: Austerity Fatigue1

Europe is obsessed with austerity—determined to cut deep into public spending to pare the debt. So is the Tea Party and Republicans in the United States. As if to prove the point, 25 of the 27 European Union (EU) members have agreed to a new “fiscal compact,” which obliges each of them never to have an underlying budget deficit (after adjusting for debt disbursements and the business cycle) of more than 0.5 percent of gross domestic product (GDP). The United States ran a deficit close to 8 percent of GDP in 2011.

With the EU flirting with recession (indeed Greece, Portugal, Belgium, Italy, and the Netherlands are already in recession—defined as two consecutive quarters of GDP declines), it is legitimate to ask: Is austerity becoming self-defeating? The example of Greece is real. In exchange for more bailout monies to keep the nation afloat (a second tranche of €130 billion is now needed) from the troika, viz. EU, European Central Bank (ECB), and the International Monetary Fund (IMF), Greece was forced to adopt still more severe austerity programs amid intense social unrest and destructive rioting. Greece’s GDP had slumped 7 percent in 2011—its fifth year in recession, coming this time after harsh austerity measures imposed in September 2011.

Contributing to the malaise has been deteriorating business and consumer confidence as unemployment (already at 21 percent) keeps rising, and mounting fears over “Grexit,” Greece’s exit ...

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