Has Europe's Love Affair with Austerity Hit a Rough Patch?

Impervious to international criticism, European policymakers remain fundamentally faithful to the path of fiscal restraint advocated by Germany

Jose Garcia Zarate 24 June, 2013 | 3:29PM
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Is Europe's love affair with austerity going through a rough patch? Many international observers may have reached that conclusion in the wake of the European Commission's decision in late May to grant a number of countries—including Spain, France and Portugal—extra years to meet their budgetary consolidation targets. This move came along with a raft of official pronouncements from key members of the Commission (such as President Barroso) on the imperious need to foster economic growth in a continent where unemployment, particularly affecting the young, has reached unacceptably high levels.

However, concluding that austerity is in the process of being phased out would be wrong. Leeway in the shape of extra time to get national budgets in order, plus a few, insufficiently funded, initiatives to deal with the plight of the unemployed, do not threaten austerity's role as the cornerstone of economic policy formulation in Europe. Indeed, impervious to international criticism (consider the EU Commission's disdain at the IMF's critical review of the handling of the Greek bailout), European policymakers remain fundamentally faithful to the path of fiscal restraint advocated by Germany.

Meanwhile, hopes for some extra relief via the monetary policy route were quickly dashed when the European Central Bank, or ECB, chose to keep interest rates on hold at 0.5%. This, despite current—and expected—inflation well under the ECB's price stability target of 2.0% and mounting evidence of a deterioration of growth prospects. The ECB's updated round of macroeconomic projections foresee the eurozone's GDP contracting by 0.6% in 2013 and growing by a paltry 1.1% in 2014, while average annual inflation should remain in a 1-3-1.4% throughout.

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About Author

Jose Garcia Zarate

Jose Garcia Zarate  is Associate Director of Passive Strategies Research for Morningstar Europe