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International

Europe’s Woes a Lesson for Budget Hawks

Eurozone Unemployment(Analysis) At the direct instigation of Germany, many eurozone countries are being forced to swallow a bitter pill: government budget cuts at a time of recession and high unemployment. The remedy of drastic cuts to government spending in order to balance a government’s budget during a recession is being forced again – this time on Cyprus, when the eurozone’s unemployment rate reportedly sits at 12%, with Cyprus already reported at 14% in February 2013.1

Because these countries belong to the eurozone, and the economically dominant country Germany is still haunted by an incident of hyper-inflation during the 1920s, they cannot rely on monetary “easing” to address the current financial crisis. Whereas economists criticize strict adherence to exchanging money for gold at a fixed rate (the so-called “gold standard”) for worsening and lengthening the Great Depression of the 1930s, Germany’s insistence on an inappropriately “tight” monetary policy during recession and financial crisis amounts to the same thing: a system that is impeding recovery from recession.

With little or no influence over the eurozone’s monetary policy, countries facing collapse of their banking systems are forced to turn to bilateral or multilateral aid (“bailouts”). This aid generally comes with a stipulation that government deficit spending be slashed, a fiscal action that many economists do not prescribe for a recession.

The eurozone’s worsening economic performance in the last few years comes at a time when many central government budgets were drastically cut at the insistence of Germany and other countries providing bailouts. This negative performance supports the prescription by economists to refrain from slashing government budgets during hard economic times, for it only serves to worsen economic performance and impede recovery from recession.

This is an important lesson for deficit “hawks” to learn here in the US. The time to repair government fiscal deficits is not during a recession or recovery from a recession – government debt should be paid down in better economic times, serving in some sense as insurance against business failure to generate economic growth.

1 Eurostat.

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