The Limits of Austerity Continue to Be Tested

Greece will have to cut another 5.5% in GDP of government spending or miss the budget targets it has set for a bailout. This is according to a European Commission report that reporters from Reuters read. In specific the report said: “However, current projections reveal large fiscal gaps in 2013 – 14,” adding that the shortfall for the two years totaled 5.5%.

News of the report comes one day after eurozone financial ministers warned Spain that its 2012 deficit of 5.8% of GDP was unacceptable. Spain was forced to knuckle under and commit to a 5.5% level. The national government will have to find 5 billion euros in expense reductions or tax increases above the 30 billion euros it has agreed to in the past.

Almost every week, another nation has been found to be short on its austerity plans because either these governments have not cut enough or their GDP growth rates have been undermined by the region’s recession. Usually it is the effect of the recession and not the will of the governments to further reduce expenses.

What the finance ministers who have pressed for more austerity in some EU nations with the weakest economies refuse to admit is that soon there will be little more to cut. Social safety net programs have been reduced sharply, which is appropriate given the levels at which they have existed for years. Minimum wages have been lowered in some countries, which almost certainly will cause drops in tax revenue. Any stimulus money that once was available to bring down double-digit unemployment is gone. Infrastructure investment reductions eventually will affect productivity.

Many economist have pointed out that austerity is the enemy of expansion. That may be true. What is more likely to be true is that cut after cut after cut in government spending in the budgets of Greece, Spain and a growing number of other countries effectively will end as the ability to make the cuts become unattainable. The requests for austerity will become unrealistic — nothing more than an attempt to insist on actions that can no longer be accomplished.

Douglas A. McIntyre