Thursday, April 11, 2013

Is the Austerity Front Crumbling?

The eurozone is reluctant to admit formally that it is changing its austerity strategy, but in fact it is searching in every corner of national budgets to alleviate the squeeze on its troubled economies, and rightly so.
Recently, member states which have missed their budget targets (and that has been most of them) have been given more time to reach their objectives, implying less fiscal tightening in the near term.
I think Davies is unduly optimistic. Such tinkering around the edges of the problem will not deal with the core reality, which is that a massive amount of wealth has been or will be destroyed (collapsing asset prices, bond write-downs, etc.), and Europe has yet to share those losses in an equitable way. Until an agreement on burden-sharing is reached, which gives some relief to the weaker economies and accepts greater burden for the stronger ones, the application of more band-aids will not stanch the bleeding.

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