Tags: Eurozone | Economic | Catastrophe | austerity

Expert Warns WaPo: Cutbacks Pushing Eurozone Into Economic Catastrophe

By    |   Friday, 20 April 2012 11:37 AM

Austerity measures have backfired in Europe and are pushing the eurozone into an economic catastrophe, a financial expert warns in a Washington Post editorial.

Cutting government spending has created a vicious downward spiral of more unemployment and collapsing demand that has shrunk tax revenues and has increased government debt, says David M. Smick, a financial policy strategist and editor and publisher of the International Economy magazine.

Greek debt-to-GDP ratio increased from 127 percent in 2009 to more than 160 percent last year. Eurozone policy makers thought they could create economic growth through fiscal restraint. They were wrong.

"The austerity medicine appears to be killing the patient," he writes.

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Spain could be a game changer in the ongoing eurozone crisis, Smick says. Its crisis originated with its banks, not its sovereign debt. Unemployment is at 24 percent, and is at 50 percent among those 15 to 24. Real estate remains overvalued even after its bubble popped and prices must fall further.

But Spain plans more austerity. Financial markets, he says, believe such a tactic "is a recipe for disaster."

Some experts believe the problem is the euro itself and the sovereign debt crisis is just a symptom. Other countries have used austerity policies to reduce their debt but they achieved export booms because they had their own currencies, he notes.

Politics is the next risk, Smick warns. With Greek and French elections next month, new governments that will tear up previous bailout and budget agreements may come into power.

Speculation and predictions that the eurozone will break up as Greece and possibly other countries leave the common currency have been rampant. The International Monetary Fund warns that the eurozone may break up and prompt a global recession, reported the United Kingdom's Daily Mail.

The IMF, in its World Economic Report released this week, said collapse of the euro couldn't be ruled out.

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