This past week German Policy regulators put a foothold on the degree on which banks are able to prop trade. According the Associated Press, German officials headed by Finance Minister Wolfgang Schaeuble will require investment banks whose trading activities are … Continue reading →
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Austerity, the economic principle that seeks to increase taxes to collect higher tax revenue and decrease expenses in order to decrease budget deficits and in turn decrease government debt, has become a topic of debate throughout the Eurozone these past years.
Chancellor Angela Merkel from Germany, President Francois Hollande from France, and other European leaders as well as other economic advisors have been pushing for austerity throughout Europe as a solution to the Euro crisis that finds many EU countries struggling due to contracting economies and difficulty paying their debt.
The criticism over austerity comes from the present economic condition in the EU; many of these countries, especially the infamously called PIIGS (Portugal, Ireland, Italy, Greece, and Spain), are suffering from contracting economies, so when you increase taxes and decrease expenses you aggravate the present contraction.
Many Keynesians, including Economic Nobel prize winner Paul Krugman, claim that the EU is following the wrong path. They state that the EU should provide more quantitative easing to the economy and spend more regardless of their high levels of debt, and pay their debts later when their economies are better off.
So if this is the case, why are many of these leaders pushing for austerity? I mean many of these leaders and economic advisors come from the best universities in the world and are fully aware of the repercussion that austerity generates. Why don’t they follow the Keynesian view and pump liquidity into the markets, drop interest rates, and spur growth and pay their debts later?
The reason is that many of these EU leaders believe the economies of the “PIGGS” have become uncompetitive. They believe that pumping more liquidity and spending more will only generate more debt, and the economies will not experience a growth in GDP to debt ratio which is what the Keynesians expect. Many of the leaders of the “PIIGS” have been elected by promising more entitlement benefits, and therefore they will blow out their national budgets and only lead to a worsening of the recession as their borrowing costs increase.
Nonetheless there is still hope in the EU. What both parties do agree on is that economic reform has to be passed in order to make these economies more competitive in the world markets. With the Dow at almost record highs it seems a world market recovery is on its way. Remember “Bulls make money. Bears make money. Pigs get slaughtered”
