Is Joseph Stiglitz right calling European austerity a suicide pact?

Will Europe's economies collapse due to fiscal austerity? That's the opinion of Nobel Prize winning economist Joseph Stiglitz. Devote one minute to watching what he has to say:

Stiglitz simply cannot understand how Europe can hope to get their economies growing again with austerity, austerity and yet more austerity. Or as he put it "It reminds me of medieval medicine". Blood letting often made the patient even sicker. The response was more blood letting until the patient nearly died. "What's happening in Europe is a mutual suicide pact". 

Austerity is needed when an economy is booming

When economies are waning austerity removes demand from the system as unemployment spikes. "There will not be a restoration of confidence as long as economies keep falling, and that will continue until (the politicians) change economic course. And I don't think that's likely", Stiglitz says. 

Economists debating when and how the Euro will break up 

"Among economists the discussion is not about if but the best way to end the Euro. It could be civilian upset that does it. Youth employment in Spain has been over 40% since 2008. How much longer will they tolerate that? The policies of the new government are more of the same medicine", he says and adds "except worse". 

"The other way it may end is when the European Central Bank refuses to be the lender of last resort for some countries, precipitating a crisis. We can be sure that markets will be highly volatile and the end of the Euro will be a very severe disruption to the global economy", Stiglitz concludes

Do you agree with Joseph Stiglitz that Europe is making the same mistake as Herbert Hoover did that caused The Great Depression? Is the European austerity plan a suicide pact? Does demand in Europe need to be stimulated in order for the economies to start growing again? Will the Euro break up? Or do you believe austerity is the right way forward to make Europe grow and prosper again?

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42 Responses to “Is Joseph Stiglitz right calling European austerity a suicide pact?”

  1. Lou Barba Says:

    Hi Catarina,

    I'm not sure about the mechanics of what he is talking about. If the European economy is built and depends on luxuries and other elective purchases, then austerity would bring it down, at least for a time. I don't know if that is the case, but if their economy relies on people being greedy, then it should fail.

    Lou
    My recent post It’s Hard to Say Goodbye to Loneliness

  2. Alex Farrell Says:

    Europe is totally shooting itself in the foot with the austerity measures. Just look at how Greece has been pushing bark targets for bringing down its debt-to-GDP ratio. Obviously there is a lot of wasteful government spending going on there, but what is more important for boosting tax revenues is to implement reforms that allow for more competition in the labor force. More effective tax collection is important too, but it's harder to do when taxpayers already feel squeezed by the austerity measures.

    The smart thing to do would be to hold off on the spending cuts until AFTER the economy recovers. Then they can use their surplus to pay off debts. Unfortunately, many forget that the Keynesian approach is to not only stimulate demand through government spending during a downturn, but to also arrange for a surplus during the boom times. Short-sighted politicians tend to just focus on the next election and use wasteful spending to please their constituents.

  3. catarinaalexon Says:

    Thank you for your comment Lou. Joseph Stieglitz is talking about economic theories. The question is if economies need austerity or spending to grow.

  4. catarinaalexon Says:

    In other words you agree with Joseph Stieglitz, Alex. Good points you make.

  5. catarinaalexon Says:

    Seems you agree wiht Joseph Stieglitz, Jamella.

  6. Kay Lorraine Says:

    While I do not pretend to be an economic historian (heck, I don't even play one on TV), it seems that we were taught in college that the Great Depression was triggered by the stock market crash of 1929, and exacerbated by the drought of 1930 which left American farmers unable to raise enough craps to feed the country, thus losing their farms to banks that held the mortgages. This caused over 9,000 to fail in the mid 1930's, and because they were not insured by the federal government, depositers lost their life savings.

    It seems that it was a domino effect that ENDED in an involuntary austerity program, simply because thee was no money left to buy anything.

    It feels as though Mr. Steiglitz is inferring that a voluntary austerity program proposed by President Hoover was the CAUSE of the Great Depression rather than the result of it. But who am I to argue with a Nobel Prize winning economist.?

    What would Mr. Steigitz have Europe do? Should they just print more money to get it into circulation? Would that stimulate the economy? I've personally never cared for the euro, but it does appear that the European Common Market as a group has done some good in funding infrastructure projects. I've travelled Europe and seen a large number of needed road projects, etc. with signage indicating that they are being funded by the ECM. Or maybe Germany is funding everything……. You think?

  7. catarinaalexon Says:

    Kay, thank you for conveying your opinion. This article is all about econimics i.e does austerity or spending make an economy grow again. According to Stieglitz, who is one of the top economists in the world austerity will just lead to lack of demand and high un-employment. And that's the last thing Europe needs.

  8. Susan Oakes Says:

    Another really interesting article Catarina. Although I am not that up on economic theory I tend to agree with him in a sense. They do need to pay debt, however they must have some plans to stimulate demand. INot sure it will collapse but maybe the path they are going is to ultimately to force the break up of the Euro.
    My recent post How High Is Your Market Value?

  9. Jeannette Paladino Says:

    Catarina — I greatly admire Paul Krugman, a Nobel-prize winning economist, who writes for The New York Times. He totally agrees with Joseph Stieglitz's point of view. He's been highly critical of the U.S. Congress for not authorizing more spending to jump start our economy. He believes we must spend our way out of the recession and cutting expenses is doomed to disaster.
    My recent post When You Don’t Have a Clue What to Write for Your Next Blog Post

  10. GuyW Says:

    Europe really is between a rock and a hard place – decades of profligate government spending of money they don't have (effectively, mortgaging the children's future as it has to be repaid somehow, sometime) have got us to a point where we just don't have any more credit to draw on – the analogy of the person with lots of credit cards that sees the limits as a target and has a wonderful time until the credit runs out…

    In such circumstances, there's no real choice but to cut back, and cut back hard, to get spending levels down and reduce borrowing. The problem is that we have a population where people have got used to being provided for by the government. We see this in England – able-bodied people who have never worked and have no intention of working because they have a very satisfactory living on welfare. While I agree that the truly needy must be helped, the lazy should find it far less attractive not to work than to but in a decent day's labour.

    People need to realise that governments don't have money – they simply take money from some and give it to others, and when you get to a point where the minority of the population is supporting the majority (as we have in England), things have to change.

    Austerity is painful medicine, but the alternative is to dig an even deeper hole which will be even more painful to get out of. Sometimes one just has to take the medicine to get better…

  11. catarinaalexon Says:

    Yes Susan, he's right that demand needs to be stimulated. Hopefully the European economies will not collapse, but the break up of the Euro seems inevitable, unfortunately.

  12. catarinaalexon Says:

    Jeannette, I'm also pro Paul Krugman and read his articles. They are both most likely right. Just wish politicians would listen to them.

  13. catarinaalexon Says:

    Yes, Mika, lets hope Europe gets its act together and start growing again.

  14. catarinaalexon Says:

    Yes Rebecca, Joseph Stieglitz has alternative solutions. You can read more about what he prescribes both for Europe and the US. Authorizing spending is what he advocates for increasing demand and hence growth.

  15. catarinaalexon Says:

    OK Guy, so you disagree with Joseph Stieglitz.

  16. Patrick Says:

    I agree with Stieglitz to an extent, but I don't really see a way out. In order to kickstart the economy you would need to kickstart consumption. However, you can't do that if 1) the unemployement keeps rising and 2) if you rely on high taxation of labour to keep supporting the social security system and to pay the interest on state debt. I think Europe is in real danger right now because the social security system that has been built up after WW II is crumbling very fast and we're stuck somewhere between the "European system", which has become unsustainable and the "American system". At the same time many European countries cannot lower the taxes on labour, because that money is needed to 1) sustain the social security system and 2) to pay off the interest on the foreign debt of these countries. The danger is that within about 10 to 20 years you will have a generation that didn't make enough money (after taxes) to be able to afford private insurance and have enough private funds after retirement, while at the same time there will be no more European social security system as we have known it in these past 40 years.

  17. catarinaalexon Says:

    OK, so you agree with Stiglitz to some extent Patrick. How will the economies start growing again with only austerity, austerity and yet austerity? The high unemployment is removing demand. What is at stake here is actually democracy. Governments now need to help sustain demand in order to get the economies growing again, but they will not. Hopefully it doesn't go as far as people losing faith in democracy because there is a danger of that. Hardship is imposed upon the common man in Greece,. Greek politicians on the other hand don't set an example by lowering their salaries and benefits. They are the ones that caused the problem but innocent Greek citizens pay the price. That's not how democracy is supposed to work.

  18. roberto Says:

    Hi, Catarina, good points are visible now regarding Europe. Having the same “money”, it seems to me it is unbalanced since the beginning. Countries like Portugal, Spain, Greece, Ireland… could not have the same currency as Germany, France and almost Italy. I remember when I went to Argentina by the time the Economy minister Domingos Cavallo had made a David Coperfield performance, trying to fix the internal credit crises by… guess what?…by changing the argentinian peso for american dollar. It was not different when “Portugal became Europe” (in 1988), accepting Euro as a good money instead of the old fashion Escudo. A rent in Lisbon jumped from $1.500 Escudos to $1.500 Euro. Still the Portuguese economy was workin in Escudos… Portugal is not sustainable from my point of view, to have the same currency as Germany… because and only because Portugal is a poor country comparing to France, Italy and Germany. What about Greece. Is there any substantial industry in the country waiting for this package (E 130 billion) to start growing fast enough to pay part of this debt?

    Catarina, I am not economist… so, I am just trying to think about the issue. England is not a member of Euro community, Still its economy is in real bad shape with 25% of youth out of job market. 40% in Spain… how many in Portugal?

    Yes, these guys need some good medicine, not austerity. There is no fat to be cut. thanks.

  19. catarinaalexon Says:

    OK so you agree with Joseph Stiglitz, Roberto.

  20. Jayne Kopp Says:

    I am not overly familiar with politics abroad Catarina, but I do believe there comes a time when something has to be done. Whether this is to spend or invest more to get the economy moving is the right answer I am not sure… particularly if Governments fear they can't honor their debt liabilities. On the other hand, staying frozen won't do anything either. It's clear with the unemployment rate as high as you mention… some sort of actin needs to be taken for the sake of future generations. Perhaps the old saying that you have to spend money to make money just might have to come into play. Keeping the purse strings closed doesn't seem to be getting things moving. It's been a long haul.
    My recent post Serious about Starting a Business Online? Maybe You Need to Get Cracking Then!

  21. DeniseG Says:

    Like most of the commentators I am not an economist. For me common sense suggests that austerity measures will not work if the aim is to stimulate economic recovery. As someone has already highlighted the time for cutbacks and efficiency measures is during a period of economic growth. However I understand the need to balance the books and reduce debt but is now the time to do it? Surely we need to encourage businesses by making sure the cost of employing someone is not prohibitive (as it is in Belgium). Why not consider reducing income tax so people will have more spending power and with more people in work and less claiming welfare, money to the treasury will increase. Continue with infrastructure development etc. and yes Governments, including the EU parliament and the Commission should also look to themselves and review everything from scales of pay and levels of expenses to top heavy management infrastructures and the way they manage their own business contracts. As for the Euro, I don't think it will disappear but one thing I strongly disagree with is that those wanting to join the EU have to agree to adopt the Euro when they meet all the economic criteria. Let's go back to basics and try and achieve what the EU was supposed to be about i.e. free market trade etc.

  22. catarinaalexon Says:

    Yes Mika, let's hope the world crisis is sorted out swiftly. If will help the whole world if Europe starts growing again.

  23. catarinaalexon Says:

    Yes Jayne, keeping the purse strings isn't getting the economies growing. So Stiglitz has a point, hasn't he.

  24. catarinaalexon Says:

    Seems you agree with Stiglitz about the need for spending to get the economies growing again, Denise. Cost of employing a person is a problem in the EU as well as everything else you mention and have to be rectified. Not sure I agree with you however that the Euro will not break up. Its mechanism was flawed from the beginning and unless they manage to change that which is difficult, to put it mildly the Euro will break up, unfortunately.

  25. Ron Strauss Says:

    We all tend to think in terms of 'this' or that,' 'yes' or 'no,' 'black' or 'white.'
    The economic/debt crisis in Europe demands multi-track thinking: how do we combine austerity and selective 'pump priming' with institutional reforms that basically make these economies more productive? How do we give people an incentive to work, save and create taxes? Companies an incentive to hire, train, and invest? Government an incentive to spend selectively on key growth leverage points?
    The IMF has proposals that address each of these questions. Do the governments and publics and special interest groups have the wisdom to deploy them?
    The discipline to save and invest must be rewarded, not punished. Deflation rewards those with savings and assets, inflation punishes them. I'd vote for low-levels of deflation over out of control inflation every time.

  26. Davis Ford Says:

    I think the austerity is to avoid the collapse.

  27. catarinaalexon Says:

    Yes it's to avoid bancrupcy, David. But the economy will not grow with out stimulus. It's like if you just cut your expenses but didn't do anything to achieve whatever it is you want to achieve.

  28. catarinaalexon Says:

    True, Tosin.

  29. catarinaalexon Says:

    Yes there needs to be a combination of austerity and spending, Ron. If not the economies will not grow and the problems will get worse.

  30. Keyuri Joshi Says:

    This is a tough one Catarina. I find every aspect of economy to be fascinating but as several of the commenters have stated "I am not an economist." It is all so very complicated yet while austerity measures seem logical to me I wonder if they just become the catalyst of a vicious cycle. I hope that as a planet we can learn and apply prophylactic measures.
    My recent post A Boy, Three Fingers, and Lifelong Resilience

  31. Richard Gendon Says:

    To Alex Farrell's point, according to Keynes, governments have a responsibility to build surpluses during boom times. Unfortunately, the US government and most of the EU did not do that. Now we are each and both facing the unpleasant task of significantly increasing the debt burden at a point in time when there are no resources available to address the mounting debt. Shame on us for getting into this situation. However, those that will deny the reality, do not appreciate/understand the situation, refuse to face this reality (denial), or most likely, are cynically willing to play roulette – trying to use their public stance as a means toward attracting a political following.

    The real question is not the wisdom or lack thereof, the lack of insight, and the group-think exhibited by EU leaders, rather it is "Will the US join in" and collaborate in what has proven to be a failed philosophy, and a damnable approach.

  32. catarinaalexon Says:

    Good points Richard. In other words you agree with Stiglitz and Keynes. Many EU leaders realise it but Germany refuse because they, understandably, are not keen to pay for say, Greek people to retire at 55.

  33. catarinaalexon Says:

    Unfortunately Keyuri economies need to grow to sort out this problem. And austerity on its own will not do the trick. Hope the EU at least de-regulate to stimulate the economies.

  34. Fernando Says:

    Well, I am no expert but as one comment wrote above Paul Krugman is in complete agreement with Steiglitz. They are modern Keynesian, I guess, and I have sympathy with the argument in favor of increased spending instead of austerity – despite the proflilgate spening of the past.

  35. catarinaalexon Says:

    Yes Fernando, Keynes, Stiglitz and Krugman makes sense, don't they.

  36. Richard Gendon Says:

    Caterina:

    Agreed, Germany's reluctance to continue to float Greece, which until recently, was one of the least 'accountable' eurozone economies, is quite understandable. Mr.Stiglitz's statement, however, is toward Germany's domestic economic policy of invoking further austerity measures against falling exports and a stagnant domestic market. The point here is that now is the time for the German governement, which has economic and financial strength, to be spending on needed domestic projects, which would stimulate both Germany's economy and the eurozone as a whole.

  37. catarinaalexon Says:

    Yes, Germany needs to start spending, Richard. But it's presumably a bit difficult to do so whilst insisting other members of the Euro stick to austerity only.

  38. MariBesch Says:

    Hi Catarina,
    I appreciate J. Stieglitz and his opinion that austerity does not give positive impulses for economic growth, however, what Europe (especially Eurozone) needs are solution proposals. Does J. Stieglitz have useful proposals how to solve the problem, any other alternatives?
    What I see in the Europe case (better said what become obvious to me) is that we have been bungling on the fundaments we build the future for our offsprings. If we should be afraid of any Depression then of a Social Depression. We notice, in most part of societies an increasing inequality. The growing GDP is no more the right measure of well-being of a society. As J. Stieglitz said in another dabate (GDP Fetishism, 2009)…" if a few bancers get much richer, average income can go up, even as most individuals´ incomes are declining…" There is no place for solidarity and responisibilty within societies. The dilemma is the rich do not have to cut down their expenses and do not want to share with the masses of poor (threatening goverments to leave the country if taxes increases) the poor can´t cut their expanses for there is nothing to be cut.

  39. MariBesch Says:

    Further, in the above mentioned article, J. Stieglitz said: " If government spend more – even inefficiently – output goes up.In the last 60 y years the share of government output in GDP has increased from 21,4% to 38.6 % in the US, from 27,6% to 52,7% in France, from 34,2% to 47,6% in the UK, and from 30,4% to 44,0% in Germany,. So what was a relatively minor problem has now become a major one"…
    In this terms, austerity is not the problem but the fail of solidarity, responsibility and prosperity brough down to a reasonable and acceptable level. It will be very hard even impossible to some politicians to gain the support of the nation to support austerity plans , if each day the media uncover that the same politicians got caught up in a wab of lies, corruption and bribery.

  40. catarinaalexon Says:

    Mari, have not read the article that you quote and hence, I'm sorry not to be able to express an opinion on selected quotes from it. Personally think Angela Merkel is doing the best she can with the current situation.

    However, I did read his book "Freefall: America, Free Markets, and the Sinking of the World Economy" published in 2010, that I highly recommend. He's a Keynesian and against the theories of Milton Friedman, which is at the root of the global economic crisis, the problems in the Eurozone and the world economy. If the world hadn't de-regulated according to Friedman's theories the problems in the Eurozone wouldn't be as bad as they are. The trouble with Friedman's theories is that they work as long as everything is fine. But when problems start the strongest link is only as weak as the weakest link.

    What European governments need to do now is start spending on projects in order to create jobs and get the system moving and grow again, according to Stiglitz, and I should add myself. Please name one country that during a recession has grown from implementing austerity.

  41. catarinaalexon Says:

    Thank you for giving us your point of view Muhammad.

  42. catarinaalexon Says:

    Stacy, unfortunately the Economies in Europe are in a deep debt crisis. And the outcome could make the recession even worse.

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