“In the early phase of the crisis, it was essential to restore the credibility of fiscal policy in Europe, because that was fundamentally questioned by market forces,” said Olli Rehn, the European Commissioner for Economic and Monetary Affairs, according to Reuters. “There was no choice.”
Rehn’s comments strike at the heart of a debate that is currently being held not just in Europe, but in the United States, Japan, and every other economy struggling to recover from economic crisis. Broadly, policymakers have pursued one of two vectors that could lead to growth: austerity or stimulus.
But it turns out economic austerity may not work as well as policymakers previously thought. Broadly speaking, the anti-austerity argument can take two forms: formal and informal. The formal argument rests on the shoulders of government-produced economic reports, such as data out of Spain that shows unemployment at 27 percent, and seven consecutive quarters of shrinking economic activity.
The informal argument rests on the shoulders of thousands of protesters, many of whom are unemployed, who have had their lives negatively impacted because of the fiscal belt-tightening that has characterized economic policymakers in Europe over the past few years. Reports indicate that as many as 1 million people took part in peaceful May Day anti-austerity rallies in Spain on Wednesday, with similar protests held in other economically-beleaguered countries across Europe.
In America, this debate is largely split along party lines. In general, the GOP favors an austere approach to budget reform, looking to cut spending dramatically, balance the budget as fast as possible, and curb the growth of government outlays. While this is a fiscally-responsible strategy, critics — here, the Democratic camp — suggest that a prolonged period of relatively high debt will not threaten long-term economic stability.
Instead, critics of austerity champion a program that focuses on growth, and growth means spending. The thinking — currently being debated at the top levels of government, academia, and finance — is that the short-term damage caused by austerity would linger painfully in mid- and long-term recovery efforts. Spending, on the other hand, can be accommodated more comfortably, even at debt loads near or above 100 percent of gross domestic product.
Europeans have faced at least three years of severe debt crisis and five consecutive quarters of shrinking economic growth through the end of 2012. Unemployment in the region has increased slowly but steadily to a recent high of 12 percent, and austerity has played a significant role in that contraction.