Duncan Weldon
Almost two years on from the first Greek ‘bail-out’, market attention is now firmly fixed on Spain which looks set to miss its deficit targets. Bond yields are once again rising and further austerity measures are planned.
I don’t see how this can work. The lessons of Greece and Portugal are pretty clear – stringent austerity (not cushioned by falling central bank policy rates or a depreciating currency – both of which are ruled out by the Euro) will simply depress GDP, drive up unemployment and drive down tax revenues. Deficits are likely to get larger rather than smaller.
The ‘optimistic’ deficit hawks hope that, eventually, the periphery countries will regain competiveness but this process could take years (if it happens at all). Meanwhile domestic political systems are pushed to breaking point by government’s clinging to a ‘there is no alternative’ mantra.
You might expect me to say that – but what is really striking is that this view is becoming wide spread.
