Co-ordinated austerity ‘is adding to debt across the EU’

31 Oct 12
The co-ordinated fiscal consolidation being carried out by a host of European Union member states is increasing debt levels rather than reducing them, a UK-based economic think-tank claimed today.

By Nick Mann | 31 October 2012

The co-ordinated fiscal consolidation being carried out by a host of European Union member states is increasing debt levels rather than reducing them, a UK-based economic think-tank claimed today.

In Self-defeating austerity, the National Institute of Economic and Social Research said that although austerity measures were necessary for most industrialised countries, the approach being taken in the EU was ‘fundamentally flawed’.

The research, which covered 11 eurozone countries and the UK, found that the negative impact of fiscal consolidation was being magnified by low interest rates. This made the relaxation of monetary policy, which would normally alleviate some of the impact of austerity, ‘unlikely or unfeasible’. High unemployment rates and low job security were also restricting people and businesses’ access to cash, which could encourage growth.

The situation across the EU had been worsened by the co-ordinated approach to austerity ,which meant that poor growth in one member states spilt over into other member states due to their close trade links.

With the fiscal consolidation plans countries now have in place, the NIESR expects debt ratios to increase next year for the EU as a whole and for the countries covered by the report, with the exception of Ireland. In both the eurozone and the UK, the debt-to-gross domestic product ratio is forecast to increase by around five percentage points.

‘The direct implication is that the policies pursued by EU countries over the recent past have had a perverse and damaging effect,’ the report’s authors, Dawn Holland and Jonathan Portes, explained. ‘Our simulations suggest that co-ordinated fiscal consolidation has not only had a substantially largely negative impact on growth than expected, but has actually had the effect of raising rather than lowering debt to GDP ratios, precisely as some critics have argued.’

Without these policies, growth would have been higher and debt to GDP ratios would have been lower, they said. ‘It is ironic that, given that the EU was set up in part to avoid co-ordination failures in economic policy, it should deliver the exact opposite,’ the report added.

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