As discussed in several recent articles in the Daily Telegraph by economist Roger Bootle and financial journalist Ambrose Evans-Pritchard, Eurozone Eurocrats led by Germany continue to argue-against the odds-that austerity or "grinding deflation" can balance budgets.This replaces the economic role in southern Europe of traditional currency devaluations and bouts of inflation that at least for a time reduced wage and other business costs,making imports more expensive and restoring international competitiveness. The weaknesses in this argument are increasingly apparent,going by 1930s era youth unemployment and painfully slow progress on reducing government deficits. Reasons austerity isn't delivering include:
-Instead of wages falling,unemployment is rising,driving up social welfare spending
-The degree of austerity needed to force wages down is prevented by labour market rigidities and is politically impossible anyway
-Because government spending has been the main driver of the EU's economic growth for about 15 years, austerity means increasing taxes coupled with slowing the growth of government spending instead of cuts. Increased taxes depress consumer spending that creates most jobs.This may explain the IMF's belated discovery that austerity is far less effective these days than in the past 30 years.
-Cost discipline in Germany and the Netherlands gives a permanent competitive advantage over spendthrift southern Eurozone countries and France,preventing the latter two from recovery through exports growth
-Germany and the Netherlands are experiencing very low growth in consumer incomes because of the euro. If they had retained their national currencies,those currencies would have appreciated,lowering import costs and that would have boosted consumer and business incomes,increasing spending on imports from southern Eurozone and France.
-The huge surpluses of northern Eurozone countries are being recycled through the European Central Bank to southern Eurozone and France. This makes them insist on austerity in southern Europe to ensure they get their money back regardless of economic damage.
-Loss of confidence in the southern Eurozone has led to a flight of capital to the northern Eurozone and internationally,resulting in high real interest rates and banking crises in southern Eurozone
One hope for the future is that the severe economic depression might prepare the ground for economic recovery. A "Schumpeterian wave of creative destruction" could clear out inefficient zombie companies and force economic efficiencies all round,including in government. Such waves have succeeded in renewing economies in economic history but this time European countries' entire private sectors might be the zombies,given the heavy burdens of government spending and taxation.
In the latter event,the economic solutions would be the breakup of the euro or,extremely unlikely,immediate full economic integration in a federal United States of Europe.