Europe rethinks austerity

LONDON —  After years of unrelenting austerity, Europe seems to have turned a corner on its debt crisis -- right into a dead-end street.

Since the turmoil erupted in 2009, countries from Ireland to Greece have focused almost exclusively on slashing budget deficits and debt as the road back to economic health. Prodded by Germany and its insistence on fiscal virtue, governments elsewhere have fired workers, chopped welfare benefits and shelved big-ticket projects, turning the continent into what some call one giant “Austerity-land.”

But officials are discovering something many people know already: Crash diets seldom work, and often make things worse.

The punishing spending cuts have stifled consumer demand and economic growth, not spurred it. The 17 nations that share the euro are now stuck in their longest collective recession since the currency’s creation more than a decade ago. As their economies shrink, countries have seen their debt ratios climb, not fall -- the exact opposite of what Eurozone officials said would happen.

And in countries such as Spain and Greece, where a majority of young people are out of work and increasingly out of hope, the prospect of a lost generation looms uncomfortably large. New statistics released late last month showed that the unemployment rate across the Eurozone hit a record in April of 12.2%, or about 19.4 million people.

“Having austerity be the main focus across Europe has been a mistake,” said Megan Greene, chief economist at Maverick Intelligence, a London-based consultancy. “There needs to be a wholesale different approach to this crisis.”

Public patience with continued belt-tightening is wearing thin as misery increases and as officials repeatedly push their predictions of economic recovery further into the future. Street protests are commonplace, including one in late May by hundreds of demonstrators who blocked roads leading to the headquarters of the European Central Bank in Frankfurt, Germany.

The pressure may finally be starting to tell. Recently there have been signs that the region’s leaders, most notably in Berlin and at European Union headquarters in Brussels, are rethinking their dogmatic pursuit of spending cutbacks and balanced budgets.

“While I think this policy is fundamentally right, I think it has reached its limits,” Jose Manuel Barroso, president of the European Commission, said in April. “We cannot apply a one-size-fits-all program to the European countries.”

Economists, U.S. officials and the International Monetary Fund have all been making that same argument for months, urging the EU to lighten up on austerity, or at least temper it with an emphasis on growth, especially in the worst-hit countries.

Last week, the International Monetary Fund released a report saying Greece’s first multibillion-dollar bailout in 2010, which the agency signed off on, was flawed. Among the mistakes were an overly optimistic assessment that Greece’s debt burden would be sustainable and a failure to see that the country would slide into a depression as a result of excessive austerity.

Advocates of a more nuanced policy note that U.S. economic performance has easily outpaced Europe’s and that Japan is witnessing a comeback. Both nations’ central banks have sought to stimulate their economies by, in effect, printing money.

In Europe, by contrast, recession has begun to spread from ailing countries in the south to the sturdier economies of the north, such as the Netherlands. Even powerhouse Germany is flat-lining.

Many experts say it’s long past time for more robust European nations to foster demand -- for example, by allowing wages to rise -- to offset flagging demand among their neighbors.

“What we need to see is a stimulus coming from the stronger countries and ... less austerity for the weaker countries,” economist Greene said. “Right now it’s just the weaker countries doing all the adjusting, ensuring that they’re all going into recession, if not depression.”

But that argument has received short shrift in the corridors of power, particularly in Germany.

With German taxpayers fuming over having to fund bailouts for countries they view as financially reckless, Berlin has been the driving force behind austerity, going so far as to demand that spending limits be written into EU law.

German Chancellor Angela Merkel has repeatedly insisted that there is no alternative to cost-cutting. As Europe’s most powerful leader, she sets the agenda.

Critics of single-minded austerity acknowledge that overspending had become a problem in some European nations and that decisive action was necessary as markets pushed up their borrowing costs to unsustainable levels. But so many countries cutting so much so fast, they contend, has turned out to be an act of collective kneecapping that has crippled the entire region.

“Just about every independent economist I know of has thought that the fiscal austerity programs would cause severe recessions,” said Jeffrey Frankel, a professor at Harvard’s Kennedy School of Government who published a recent paper on Europe’s lingering debt crisis.

“Fiscal discipline is necessary in the long run; that’s certainly how countries got into this mess, like Greece.... But the time to fix it is a boom, when the economies are expanding,” he said.

Analysts detect some repositioning underway in Brussels.

Bailed-out countries such as Ireland and Portugal have been given extra time to pay back their emergency loans. Although no one expects Germany to fling the taps of stimulus spending wide open, especially not with a national election due in September, Berlin has signaled a modest willingness to help encourage growth and address the suffering caused by austerity. It recently unveiled initiatives with European partners to tackle youth unemployment and will host a summit on the topic in July.

The German state development bank has also announced that it would help finance credit-starved Portuguese businesses.

On May 29, in the clearest indication of a pullback from austerity, EU officials agreed to give France, Spain and several other countries more time to meet their deficit-cutting targets.

The relaxation followed increasingly outspoken statements against austerity by the leaders of France and Italy, the Eurozone’s second- and third-largest economies, respectively.

Many experts say that more is needed than simply stretching out austerity over a longer period. They call for structural reforms in countries such as Spain and Italy, including making it easier to hire and fire workers and liberalizing professions that are run like closed guilds.

More pro-growth policies -- investment in big infrastructure projects, for example -- could jump-start faltering economies and help countries make the revenue they need to pay down their debts, analysts say.

“Much more intelligent would be to have a long-term regime which

That, however, would require a farsightedness and cooperative policymaking that critics say has been sorely lacking.

“The approach to the crisis from the beginning has been to do the minimum necessary at each stage, day by day, and not take it from a big perspective,” said Frankel. “It’s the worst way.”

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henry.chu@latimes.com