April 22nd, 2012
09:44 AM ET

Zakaria: Europe suffers from too much austerity

By Fareed Zakaria, CNN

A new poll in the United States shows that Americans are still deeply frustrated at the slow pace of the economic recovery. That's understandable. Unemployment stays stubbornly high. But I was just in Europe, and they think America is booming.

Consider this: the U.S. economy is on track to grow between 2 and 3 percent this year. In Europe, by contrast, half the eurozone economies are going to actually shrink this year - and not one major European country will grow over 1%.

Last Thursday, Christine Lagarde, the head of the International Monetary Fund, and former French Finanace Minister of France, said there were "dark clouds" hanging over the global recovery and that the eurozone was at the "epicenter of potential risk." Borrowing costs for countries like Spain, Italy and Greece are rising again.

What is going on? Didn't it look like the Europeans had managed to avert a crisis only a few weeks ago?

Yes it did. Mario Draghi, Europe's new Central banker, had adopted a version of Ben Bernanke's policies and injected money into the European financial system and economy. But his efforts are now being undercut by the German Bundesbank, which reflects Germany's obsession about inflation even at the cost of growth.

The larger failure, shared across Europe, has been too much austerity.

Consider that data we started with. The U.S. economy, which received monetary and fiscal stimulus, will grow at well over 2% this year. European economies that have followed the path of cutting spending and raising taxes to reduce deficits are finding themselves in a downward spiral: cutting spending means laying off people, which means less demand for good and services, which means the economy shrinks, which - ironically - means lower tax revenues and thus larger budget deficits.

Take a look at Britain. Britain has followed a brave austerity plan, cutting government spending across the board and raising taxes. The result, British growth has stalled; the economy will grow barely 0.8% this year. And while its budget deficit was predicted to be under 13 billion dollars in February, it was in fact 24 billion dollars for that month alone.

After its austerity programs, Spain has hit 20% unemployment - 50% youth unemployment - and now has a much larger budget deficit than projected.

Europe needs structural reforms that will cut spending over the long term - by raising retirement ages and cutting benefits. But it also needs pro-growth reforms that open up its labor market. But most importantly for now it needs to stop imposing austerity in a depressed economy and learn from something from the example across the Atlantic. Two or 2.5 percent growth might not look so great in America, but it's a lot better than negative 0.3 percent, which is the current estimate for the eurozone's economic growth.

For more of my thoughts throughout the week, I invite you to follow me on Facebook and Twitter and to visit the Global Public Square every day. Be sure to catch GPS every Sunday at 10a.m. and 1p.m. EST. If you miss it, you can buy the show on iTunes.

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Topics: Economy • Europe

soundoff (497 Responses)
  1. dljr60

    Mr Zakaria, last week you were demanding that we Americans pay more taxes! Lack of taxes is not the problem. A selfish, dumb as dirt government, who has no sense of working within a budget, is the source of our issues along with trying to make the USA a welfare state. We are the USA. We are not Europe. We have a different system. Thus, invalid to compare our attempt at recovery with Europe.

    April 24, 2012 at 5:39 pm | Reply
  2. Bianca

    Please do not compare US with Europe. And also, while at it, please stop suggesting that the European problems are the cause of sluggish economy in US. Now, equally nonsensical is to say that US economy is growing. The numbers the Government is making up, are not making sense. Inflation has started to bite, and for years now bankers are getting cheap money from Fed, while retirees have to play outrageous taxes everytime they withdraw from their IRAs.
    As for Europe, please do not mix things up. The austerity is the problem? And what is the solution? To let the unelected new Fund impose banking cartel on Europe, in the name of giving credit to debtor nations - to improve their economies? This is a MONSTROUS proposition. Greece is burdened not by their debt, but by the criminal interest on the debt. At 18%, Greek debt DOUBLES every four years. That is not the money they borrowed or spent on their "lavish" lifestyle. That is the money paid forcibly to the banking cartel that can AT WILL decide how much interest countries will pay. And if Europe ratifies the Fund, there will be NO LEGAL OR LEGISLATIVE RECOURSE TO THE FUND'S AUTHORITY. This is called SLAVERY. So, are you just advocating that Goldman Saks takes over Europe through its unelected ex-Goldman executive, Mario Draghi - whom you support? So, what IS the alternative? German insistence on FISCAL PACT, that is, euro member nations meeting rigorous deficit guidelines - is not good? OK, it is not good, as it will bring about catastrophic economy. Agree. But to let Mario give lavishly to banks in the name of "saving" anyone, is ridiculous! No matter how much money Mario spends, he will just be coming to EU countries demanding that they IN SIX DAYS PAY OUT ANY AMOUNT HE DEEMS NECESSARY. And he is not legally liable FOR ANYTHING? iS THIS A SOLUTION? No, it is not. Therefore, the best thing for Europe would be that Sarkozy loses the election. And that Germany gets anyone else who DOES NOT SUPPORT BANKING CARTEL. With new partners, EU will have some teeth in negotiating with those who are sucking the life out of European economies. And there is another alternative: let each country have its own central bank, managed by their own government not private cartel. Then they can - among themselves - decide how to deal with the banking cartel, as well as the bevvy of "instruments" that are imposed on them. Financialization of European economy is about to kill them - and radial solutions are needed. For starters, Euro Zone members can pay off amonts that were really borrowed, not criminal interest. And each country that will have its debt erased in such manner should be not allowed to borrow on private markets. If anyone does that, it must be expelled from the union - and left to the tender marcies of the banking giant squid, and prescriptions advocated in this article!

    April 24, 2012 at 9:13 pm | Reply
    • blucorsair

      They already tried letting each country have its own central bank except back then they utilized different currencies which was more successful than what they're doing now! Likewise, having a common currency amongst different countries is similar to having to many captains on one ship.! The Brits were smart and stayed out of the EU currency debacle, because there is no central governing authority that prevents out of controll spending! ...Greece!

      April 25, 2012 at 2:14 am | Reply
  3. Grayson Scogin

    I think when the textbooks are written in 20 years they're going to point to this as proof that austerity programs don't work. As Paul Krugman said, what did this crisis teach us about economics and Keynesianism? Basically nothing new. All of this is already established knowledge.

    April 25, 2012 at 2:26 am | Reply
  4. RudyG

    There he goes! He's been saying it for days. How wonderful that we have a 2+% growth, while Europe has -10%. He feels that by comparing us to Europe people will forget the current feeble condition of our economy, and that we will feel all giddy about Obama's policies. Keep up the good work, Zakaria. Pretty soon you will have so little credibility you won't be able to help Obama anymore. I'm an independent, but your ridiculous, constant pro-Obama articles are getting old. Pretty soon I'll be reading FOX! Ouch....

    April 25, 2012 at 8:27 pm | Reply
  5. Independent Thinker

    We are only a few years away from having the same debt to GDP ratio as Greece. If people in this country do not begin to wake up and smell the manure that is being spread by "certain" politicians, it won't be the Republicans taking away money from senior citizens, poor children, and the disabled. It will be the holders of the US debt (China and others) that will be demanding it.

    April 25, 2012 at 10:13 pm | Reply
  6. Badbusiness

    The head of the IMF, Christine Lagarde, says that there are “dark clouds on the horizon” for the global economy.

    April 26, 2012 at 1:44 am | Reply
  7. Badbusiness

    The top economist for the IMF, Olivier Blanchard, recently made this statement: “One has the feeling that at any moment, things could get very bad again.

    April 26, 2012 at 1:44 am | Reply
  8. Badbusiness

    George Soros is publicly declaring that the European Union could soon experience a collapse similar to what happened to the Soviet Union.

    April 26, 2012 at 1:47 am | Reply
  9. Badbusiness

    A member of the European Parliament, Nigel Farage, stated during one recent interview that it is inevitable that some major banks in Europe will collapse….
    There are going to be some serious banking collapses and the impact of that on some sovereign states, will be serious. I’m afraid we’ve gotten to a point where we really can’t stop this now. We’re beginning to reach a stage where however much false money you create, the problem becomes bigger than the people trying to solve it. We are very close to that point.
    When I talk about the threats and the risk that this thing could wind up in some kind of rebellion, some sort of awful social cataclysm, they (other European politicians) are now very worried indeed. They will talk to you in private, but in public, nobody dares utter a word.
    I think the deterioration, in the last two or three weeks, in the eurozone is very serious indeed. It’s the bond spreads in Italy and Spain. It’s the fact that youth unemployment is now over 50% in some of these Mediterranean countries.
    It’s riot and disorder on the streets. And yet a month ago I was here and there was Herman Van Rumpuy telling us, ‘We’ve turned the corner. Everything is solved. There are no more problems with the eurozone.’ What a pack of jokers they look like.”

    April 26, 2012 at 1:47 am | Reply
  10. Badbusiness

    Over the past six months, hundreds of prominent bankers have resigned all over the globe. Is there a reason why so many are suddenly leaving their posts?

    April 26, 2012 at 1:50 am | Reply
  11. Badbusiness

    The 9 largest U.S. banks have a total of 228.72 trillion dollars of exposure to derivatives. That is approximately 3 times the size of the entire global economy. It is a financial bubble so immense in size that it is nearly impossible to fully comprehend how large it is.
    The financial crisis of 2008 was just a warm up act for what is coming. The too big to fail banks are larger than ever, the governments of the western world are in far more debt than they were back then, and the entire global financial system is more unstable and more vulnerable than ever before.
    But this time the epicenter of the financial crisis will be in Europe.
    Outside of Europe, most people simply do not understand how truly nightmarish the European economic crisis really is.

    April 26, 2012 at 1:51 am | Reply
  12. Badbusiness

    Spain, Italy and Portugal are all heading for an economic depression and Greece is already in one.
    The European Central Bank was able to kick the can down the road a little bit by expanding its balance sheet by about a trillion dollars over the last nine months, but the truth is that the underlying problems in Europe just continue to get worse and worse.
    It truly is like watching a horrible car wreck happen in slow motion.

    April 26, 2012 at 1:52 am | Reply
  13. Badbusiness

    The good news is that there is still a little time to get yourself into a better position for the next financial crisis. Don’t leave yourself financially exposed to the next crash.
    Sadly, just like back in 2008, most people will never even see this next crisis coming.

    April 26, 2012 at 1:53 am | Reply
  14. Badbusiness

    Romania's government fell Friday in a no-confidence vote, as opposition parties seized on widespread public anger over biting austerity measures, cronyism and corruption.

    April 27, 2012 at 11:36 pm | Reply
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