Extreme Fiscal Austerity Proven Counter Productive

Includes: FXE
by: Lok Sang Ho

This is an excerpt from the February Monthly Review of the Congressional Budget Office. It shows that the U.S. budget deficit is under control, and shrinking fast, even though the U.S. never adopted the kind of austerity measures adopted in the UK or in the eurozone.

The federal budget deficit was $295 billion for the first four months of fiscal year 2013, $54 billion less than the shortfall recorded for the same period last year, CBO estimates. Without shifts in the timing of certain payments in both years, however, the deficit for the four-month period would have been about $84 billion lower this year than the amount in fiscal year 2012. If lawmakers enacted no further legislation affecting spending or revenues, the federal government would end fiscal year 2013 with a deficit of $845 billion, or 5.3 percent of gross domestic product (GDP), CBO estimates-compared with $1.1 trillion, or 7.0 percent of GDP, in 2012.

American unemployment is falling, and the economy is clearly improving. But all the major countries in the eurozone registered negative growth in Q4 last year. The latest results are: France, -0.3%; Germany, -0.6%; Italy -0.9%. For the eurozone as a whole, -0.6% in Q4, and -0.9% year on year. For the UK, -0.3%.

The amazing thing about the pro-austerity countries is that despite evidence to the contrary, they continue to believe that if austerity measures did not work, it was because they were not enough. The latest unemployment rate in Greece is 27%, another record high.

The austerity measures were introduced in the name of cutting government debt and not burdening future generations. Paradoxically, they are increasing household debt, while the younger generation is losing hope and the opportunity to work.

Because employability is reduced with longer unemployment, the potential GDP is reduced. With firms not making new investment, potential GDP is reduced even more. So the economy inherited by future generations is less productive.

In an earlier article I asked the question what did Americans want and what did Europeans want. I saw American commentators criticizing Obama for causing the fiscal deficit to explode. I stated then that "The outlook for America is positive; that for Europe is bleak." All the evidence thus far has demonstrated loud and clear that extreme fiscal austerity is counter productive to the cause that its proponents want to achieve.

The sad thing about Europe and the UK is that misguided policies will continue to curse their economies for at least one decade, and most probably longer. On the other hand, America will benefit from Europe's loss of competitiveness and will enlarge its market shares in Asia and the rest of the world.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.