Eurozone: Putting a halt to spending cuts? | Business| Economy and finance news from a German perspective | DW | 05.04.2013
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Eurozone: Putting a halt to spending cuts?

The eurozone continues to be in the depths of a deep recession. While some economists argue that whittling down spending may eventually lead to an even bigger crisis, others disagree.

A growing mountain of public debt, deep recession and mass unemployment are all phenomena that immediately bring to mind the situation in Greece. But this situation also applied to Germany in the early 1930s. Former Weimar Republic Chancellor Heinrich Brüning aimed to consolidate the national budget by prescribing spending cuts. His endeavors ended up leading to mass poverty and hyperinflation. As the Weimar Republic fell apart, Adolf Hitler seized power.

Under pressure from international lenders, crisis-struck nations in southern Europe have also lowered wages and jacked up taxes, only to get caught in a vicious cycle of recession, mass joblessness and even bigger debt.

German economist Peter Bofinger said he sees some similarities when comparing the southern European nations' plight with the Weimar Republic, and claims large-scale spending cuts have contributed to the desperate situation in today's southern Europe.

"The situation in Greece is in no small way a result of the recent politically guided economic shock therapy," Bofinger sad in an interview.

More trouble ahead?

Italian voters, for instance, recently showed how little they thought of such therapy. For Guntram Wolff, deputy director of the Brussels-based Bruegel think tank, it's only a matter of time before political chaos appears in Spain, too.

Dr. Guntram Wolff from the Bruegel think tank

Guntram Wolff argues many in Germany underestimate the economic powder keg in the south

"We in Germany aren't really aware how desperate the situation is in southern Europe," Wolff said, adding that something needs to be done against widespread disenchantment there. He argued that while fiscal reforms have to be followed through, the speed of their implementation should be reduced.

New growth packages, Wolff said, should be a no-go because affected nations "are already paying high yields on financial markets, and bigger debt loads would push those yields up even higher, constituting risk."

In his opinion, Germany is the only nation in the 17-member eurozone which could, in theory, afford special growth stimulus measures. But the country keeps consolidating its budget. Federal investments are being reduced. And according to Wolff, that's the reason Germany isn't contributing as much as it could to economic recovery in the euro area.

Germany to the rescue?

The German central bank has analyzed possible effect a domestic growth package could have on southern European economies.

"By and large, it would have no impact," claimed Clemens Fuest, president of the Mannheim-based Center for European Economic Research. "We won't be able to fight recession in southern Europe with domestic growth incentives."

He added that southern European states do not just have a demand problem. "Prices there have got out of hand," he said. "Wages and labor costs have spiraled out of control, and must be brought down again. If you were to implement a growth scheme, you'd only slow down the necessary adjustments."

Fuest said the crisis would last longer that way, but conceded that special programs to reduce unemployment among young people could be productive.

"I'm in favor of spending more money on young people's vocational training," the economist said. The fact that more than every second youth in Spain and Greece is unemployed is an unacceptable situation.

Embarrassing situation

Economic pundit Wolfgang Franz agreed.

"Large-scale youth unemployment is not a wound that heals over quickly in terms of people's chances to be successful on the labor market later on," Franz said. "What remains is a nasty scar of slimmer opportunities to land a job and get decent pay."

Clemens Fuest, head of ZEW Institute in Mannheim

Clemens Fuest thinks Southern European need to do their homework

Franz added that southern Europe could learn a thing or two from the German vocational training model, "Instead of subsidizing agriculture, young people should be supported by opening more training centers, complete with competent instructors."

But even if affected nations were to play along, it would take years for the measures to show any tangible impact. In the meantime, Guntram Wolff said direct southward transfers are indispensable.

"There's no avoiding that topic," Wolff said. "A monetary union needs cross-border stabilization mechanisms - otherwise it won't be around for long."

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