Without growth, there’s only one ending for Euro debt crisis

Euro blackboard

Will peak oil erase the Euro? Photo: Images_of_Money/Flickr.

European voters are rejecting further fiscal restraint, showing the door to former austerity-imposing politicians in Greece and France. In a similar spirit, European Central Bank President Mario Draghi is now calling for a “growth pact” to replace the “fiscal pact” demanded by Angela Merkel’s government in Germany.

What Europe’s voters and its central bank are coming to recognize is that unremitting fiscal austerity measures are the wrong prescription for what ails the European economy. Instead of curbing budget deficits, they’re actually exacerbating the continent’s economic problems.

Economics textbooks will tell you that hiking taxes and implementing draconian spending cuts will lead to government’s running smaller deficits. But in practice, as we’re seeing across the eurozone right now, those measures can be self-defeating. Rather than helping to wrestle down budget deficits, brutal fiscal austerity measures are actually choking the life out of much of Europe’s economy. Since tax revenues are a function of economic activity, lifeless economies are making it that much harder for countries to stave off recession. In Greece, for instance, the budget deficit isn’t getting any smaller. The only thing austerity measures are shrinking is the country’s GDP.

Europe is mired in a quagmire of financial bailouts, budget deficits and austerity measures, bleak circumstances that have already fostered social upheaval and are now ushering in political change. As I argued in this space last week, sovereign debt defaults won’t be far behind. To avoid this fate, Europe has its hopes pinned on a single magic bullet—growth.

If a strong-enough economic recovery were to take hold, Europe could grow its way out of its huge fiscal deficits and save the monetary union from collapse. That’s a good plan in theory, but the complication facing Europe, and indeed the rest of the world, is that it takes a lot of energy to fuel robust economic growth. What’s more, the most important source of energy for the global economy is oil.

Consider the European economies in the worst shape: Portugal, Italy, Ireland, Greece and Spain. The cumulative national debt of these countries may as well be denominated in barrels of oil instead of euros, because millions of barrels of oil is what will be needed to get those economies growing again. Can those countries afford the cost of economic growth when oil is trading in the triple-digit range?

How much more fiscal punishment can the eurozone endure before countries start throwing in the towel? Without economic growth, there can be only one ending to Europe’s debt crisis. Default. Judging by the newly elected socialist politicians in Greece and France that eventuality is a lot closer than financial markets might think.

Re-posted from Jeff Rubin’s Smaller World.

— Jeff Rubin, Transition Voice

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  1. Auntiegrav says

    The question that isn’t asked is, “Growth of WHAT, exactly?”
    Growing money is easy, just lower interest rates and let it multiply like rabbits.
    It won’t be attached to any real value, but the GDP will look good: for a while.
    It’s called “inflation”.
    Reason’s got nuthin’ to do with it.

  2. Bloomer says

    “Economic growth is the increase in the amount of the goods and services produced by an economy over time”. Population growth should drive economic growth, more people more demand for goods and services. But the cost of producing those goods is rising, they are become more dear. In fact, goods and services are becoming so expensive that many of the workers producing them can not afford to buy them. In a Globalized World, oil is the key component in the cost of goods sold. Not only is the world going to get a lot smaller “Jeff Rubin” but in my view the world is going to get a whole lot poorer.
    Abundant, inexpensive oil has enabled us to sustained a living population of 7 billion souls. Greece is the canary in the coalmine. So goes Greece, so goes Europe. In the world of costly energy “economic growth” will stagnate at best. Asking those with little resources to bare the brunt of our current economic malady will result in social reprecussions. Raising taxes on the wealthy so others can survive, is not only the humane thing to do, but will also be in the their own self-interest. As competition for the bare necessaries in life become fierce, the world inhibitants will become more hungry, desperate and hostile.

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