Europe More Divided Than Ever Over Austerity

Europe is seeking a balance between austerity and growth that is thin as a razor and about as easy to traverse.

Since the onset of the European debt crisis several years ago, debt-ridden countries such as Greece, Italy, Portugal and Spain have swallowed Draconian budget cuts and imposed higher taxes on their citizens primarily at the insistence of economically sound Germany. These financially-strapped countries, mostly located in southern Europe, accepted these terms in order to obtain life-preserving bailouts from the European Union.

Back when the austerity terms were being drawn up the argument against such severe belt-tightening was that it would impede growth at precisely the time when growth was most needed. That dire prediction now appears to be coming true across large swaths of Europe.

Consider Spain, where recent statistics show the number of unemployed has risen above six million for the first time in recent memory and the unemployment rate now stands above 27%. Statistics further reveal that two million out of 17.4 million Spanish households include not a single working person.

Meanwhile, youth unemployment rates in southern Europe are staggering: nearly 60% in Greece, above 50% in Spain, and approaching 40% in Portugal and Italy.

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These numbers are starting to put pressure on politicians from these hard hit countries to fight back against austerity in general and Germany specifically.

Attempting to diplomatically address the complex and increasingly tense situation, European Commission President Jose Manuel Barroso said earlier this week: “While this policy (austerity) is fundamentally right, I think it has reached its limits. A policy to be successful not only has to be properly designed, it has to have the minimum of political and social support.”

Many Europeans are Fed Up With Austerity

Perhaps nowhere is the political dichotomy more stark than in France, where President Francois Hollande was elected last year as the anti-austerity candidate over incumbent Nicolas Sarkozy, who had positioned himself as a close ally of German Chancellor Angela Merkel, widely viewed as the mastermind of Europe’s austerity movement.

But Hollande so far has been unable to reverse either austerity’s momentum or its impact and his popularity in France has plunged to historically low levels.

To put it mildly, the average European in countries where austerity measures were imposed to scale back bloated budget deficits and ensure payment of sovereign debt are now sick and tired of austerity. They apparently prefer bloated deficits and threats of default over higher taxes and soaring unemployment.

Sergio Marchionne, chief executive officer of Italian car maker Fiat, recently summed up Europe’s frustration: “Austerity doesn’t work. The impact on Italian consumers is catastrophic,” he said. “I understand austerity, but we can lose weight until we die.”

The bottom line, according to many economists, at least as it currently stands, is that austerity measures rather than promoting economic growth are plunging Europe even deeper into recession.

That sentiment is backed up by statistics: the European Commission recently forecast that the eurozone economy will contract 0.3% in 2013, the second consecutive year-over-year contraction and the first time that’s happened since the single-currency union was founded in 1999.

Naturally, the economic tightening shown in the statistics reveals a widening rift between the north, where growth is occurring in Germany, Finland and Belgium, and the South, where the economies of Greece, Portugal, Italy and Spain are rapidly weakening.

“This is a really big deal and I tend to think it’s heading for a tipping point, I just don’t know when that will occur,” said Bill O’Grady, chief investment strategist at Confluence Investment Management in St. Louis.

O’Grady compared Germany’s current role in Europe to that of the United States after World War II, when the U.S. became the “importer of last resort” for Western countries not just for economic reasons but also to maintain political stability. In other words, the U.S. bought goods from war-ravaged European countries not necessarily because the U.S. needed those goods but to promote economic growth and political stability in those regions.

Balanced Policy Requires Compromise

Germany seems unwilling to accept that role, according to O’Grady, insisting instead that debt-addled European nations, primarily in the culturally different Mediterranean regions, adopt the same austerity-minded economic policies that have turned Germany into Europe’s premier economy.

O’Grady said the current “pushback on austerity is the counterpoint to Germany’s attempt to dominate the continent.”

“This is what Germany needs to do,” he said. “They need to start spending. They could help balance the regional economy by importing a lot stuff from Southern Europe to help those countries grow. But that grinds against the whole Germanic view of the world.”

At the same time, there’s genuine concern that the political instability brought about by austerity will bring back the same too-generous policies that buried countries like Greece, Italy, Spain and Portugal in debt in the first place.

That’s where the delicate balance comes in between policies that placate voters in countries accustomed to generous government benefits and policies that require the kind of fiscal constraint that will stave off devastating defaults and sky-high borrowing costs.

Without some form of a compromise, some area of middle ground, a balance, voters will shoot down every effort at real reform of, for example, costly social benefits that could serve as a long-term economic benefit while not punishing citizens in the short-term. This is certain to happen if voters feel, as they increasingly do in Europe, that the fiscal punishment is coming from distant and remote leaders from another country, such as Germany.

So far that balance has proven elusive.