Sunday, 15 April 2012

The eurozone recession strategy

Nouriel Roubini has written an excellent article summing up the basic problem in the EU: a big push to solve the problem of too much government debt by cutting government spending without any apparent thought to boosting economic growth. This is a self-defeating recipe for, at best, anaemic growth and, at worst, continuous recession. Unfortunately, the UK government seems to be pursuing a depressingly similar plan. 

Roubini captures the problem neatly:

"The trouble is that the eurozone has an austerity strategy but no growth strategy. And, without that, all it has is a recession strategy that makes austerity and reform self-defeating, because, if output continues to contract, deficit and debt ratios will continue to rise to unsustainable levels. Moreover, the social and political backlash eventually will become overwhelming."

Regarding the social backlash, it amazes me that the Greeks have remained so stoic considering the demands being made of them. If the economy does not start to grow this year, people may reach the conclusion that all this was for nought at which point all bets are off. Unsurprisingly, opinion polls in Greece show strong and rising support for political parties which advocate a "default and exit" approach and if the current plan continues to yield nothing but hardship people will naturally start to wonder whether the alternative could be much worse.

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