Are the PIIGS any better off after 6 years of austerity?
Is Austerity working, or has it only compounded the economic woes of the so called PIIGS?
To many observers, they say that all it is doing is adding to the massive unemployment, destroying any vestige of growth potential, contributing to an already nervous consumer outlook, but the most damning element of all…it is not actually leading to a decrease in debt-to-GDP.
According to the latest data published by Eurostat, the overall debt-to-GDP ratio for the Eurozone is now sitting at 92.6%, just a tad below its historical high right after the GFC and in fact up from 90.7% a year ago. While the data for the Euro region as a whole is not good, the detailed data for individual countries is much worse as it shows a very cruel reality: the countries where austerity has been more pronounced, ironically to get the Debt:GDP ratios down are precisely the countries that have seen the worst ratios. In simple words, austerity has failed, as a debt reducing tool.
Portugal, Italy, Greece, and Spain have all experienced a rise in their respective debt-to-GDP ratios over the last quarter of 2013, while Austria, Luxembourg, Belgium, all countries where austerity has been in short supply, experienced a decrease in their ratios. The problem with the current model is that those countries that have a greater need for a reduction in their debt measures are those who are experience the worst results and vice versa. Net effect? The poor tend to become poorer with time while the rich tend to become richer. It is almost as if there is an unspoken economic ware designed to continue to feed the wealthy at the expense of those struggling – a peculiar type of reverse robin hood.
If the table above does not illustrate starkly what we are saying here, then the chart below will eliminate any remaining doubts about the success of austerity in reducing the debt profile of the PIIGS.
While I am not advocating that these countries should engage in any kind of uncontrolled expense along the lines of what is happening in Japan, I must say that some five years of the unsuccessful application of fiscal policy is probably enough now. These austerity measures are just creating huge income gaps in those countries because governments have largely been targeting the middle classes – traditionally the backbone of an economy. In the end, taken to its extreme, the middle classes will just vanish as the gap between the rich and poor becomes more of a chasm. At the same time, we all know that to reduce debt-to-GDP there are at least two mathematical options: one can either reduce the numerator or increase the denominator. The policy implementation in Europe has been targeting the numerator in a reckless way. It has just added to the woes of the PIIGS’ economy creating record high unemployment rates and further GDP declines. The austerity medicine has in fact been so strong that Europe is now at risk of deflation.
With all this in mind, I personally see a Europe that is now in much worse shape than it was a few years ago. It is true that the banking system avoided the worst, but who was that “worst” for? To me it seems like the bankers and the rest of people, the man on the street have actually faced the “worst”.
I look at the government yield spreads for countries like Portugal and the numbers puzzle me. Why on earth is Portugal now borrowing at less than 4% when they were borrowing at more than 10% a few years ago? Is it now less risky? Well, the debt pile is still growing – work that one out. The unemployment rate is above 15% and GDP growth is non-existent. If that makes debt less risky, then I think I need to go back to college and restudy the textbooks!
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