More Pressure on Austerity Plans in Spain and France

France announced that its unemployment rate reached a 12-year high last quarter. The finance minister of Spain said he expects the nation’s GDP to contract this quarter and next. The pressure on austerity plans as a means to cut deficits has risen again. It increasingly looks like the byproducts of these plans will cause further economic problems.

France announced that its unemployed population reached 2.85 million, which the Financial Times writes is a 12-year high. France is one of the nations in the eurozone that has been expected to continue to grow economically. At least that was the hope of other countries in the region. France is the smaller of the dual pillars that support the eurozone’s financial fate; Germany is the larger one.

At the same time France reported its numbers, Spain’s financial minister, Luis de Guindos, said he expects GDP in the nation to drop 0.2% this quarter and 0.3% in the next. The country has a 20% plus unemployment rate and its banks find themselves under extreme pressure because of low capital rates.

Taken together, the news from the two nations begs the question of whether austerity is a reasonable means to fix the deficit-ridden countries of the eurozone. The theory is that sharp reductions in government expenditures will lower the red ink on the balance sheets of most of the region’s countries. That only works if revenue to the treasuries of these nations does not erode. Recessions and high unemployment are a recipe for shortfalls in tax receipts.

Many economists believe that the lack of government stimulus will put regional economies into flat spins. Deficit reduction will falter because of low government revenue, which will lead to more calls for additional budget cuts. The economic indicators from nations like France and Spain demonstrate the risk of austerity plans that can rob countries of the investment that might help rebuild them financially.

Douglas A. McIntyre