Austerity is the have-to choice faced by the governments and if the government decides to continue current policy, there are the severe consequences.
Economist Martin Wolf analyzed the relationship between cumulative GDP growth in 2008–2012 and total reduction in budget deficits due to austerity policies (see chart at right) in several European countries during April 2012. He concluded, "In all, there is no evidence here that large fiscal contractions [budget deficit reductions] bring benefits to confidence and growth that offset the direct effects of the contractions. They bring exactly what one would expect: small contractions bring recessions and big contractions bring depressions." Changes in budget balances (deficits or surpluses) explained approximately 53% of the change in GDP, according to the equation derived from the IMF data used in his analysis.
Similarly, economist Paul Krugman analyzed the relationship between GDP and reduction in budget deficits for several European countries in April 2012 and concluded that austerity was slowing growth. He wrote: "this also implies that 1 euro of austerity yields only about 0.4 euros of reduced deficit, even in the short run. No wonder, then, that the whole austerity enterprise is spiraling into disaster." Granted, the austerity measures in eurozone do reduce the budget deficits of the countries to a considerable extent. However, the negative impacts it brought about have far outweighed the benefits. Therefore the governments should not blindly apply austerity measures to save their economy when they were experiencing a recession. The governments should aim at booming their economy in long-run instead of being obsessed with shortcut measures. The governments should try to maintain their AD through exportation. they should cooperate with fast-growing economy like China and US and try to pull their AD towards full-employment equilibrium. Then they can handle the deficit without much negative consequence incurred. |