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Europe's Foolish Austerity

The European Union is the world’s largest provider of foreign aid, and a couple of weeks ago it staged what it calls European Development Days. EU development officers met with officials from around the world, as they do every autumn, to discuss Europe’s aid and development strategies for the upcoming year.

Put simply, the European officials told their visitors from Africa, Asia, and elsewhere that spurring economic growth is the key to strengthening their economies and pulling their people out of poverty. It called for transparent public-private partnerships to fund new business and economic programs. The intent was to stimulate economies and create more jobs.

What’s so unusual about that? Well, as Europe heads into its third year of debt crisis, it’s still using exactly the opposite approach for itself—austerity, the most patently foolish approach imaginable.

Across Europe, people are angrily demonstrating against their governments, demanding an end to austerity. Ten days ago, an estimated 100,000 protestors virtually paralyzed London, carrying a clear message to Prime Minister David Cameron: “Austerity isn’t working!”

Germany is the state that insists on austerity—the “eat your peas” approach, as some Europeans are calling it now. Think about what austerity actually does.

Under austerity plans, governments must radically reduce spending. How do they do that? They buy fewer goods and reduce government services. Well, manufacturers sell those goods, people provide the services. When the government cuts back, the companies and manufacturers lose significant income. So they have to lay off large numbers of workers. That reduces the government’s income-tax revenues, raises the nation’s unemployment rate and increases unemployment-benefit payments.

All of this ricochets through the economy. Other businesses suffer, too, because consumers have less money to spend. In Greece, more than 60,000 retailers have closed, throwing even more people out of work, including the retailers’ suppliers—and on and on. Is it any wonder, then, that in Greece, Ireland, Portugal, Spain, and other EU states right now, national debts are growing larger and larger every quarter—exactly the opposite of what was intended? With less income from taxes, states have to borrow more. So Greece’s ratio of debt to GDP just hit a new high of 170 percent. Portugal’s is now 120 percent.

Austerity programs drive weak economies directly into recession. It’s just that simple. And that’s exactly what’s been happening in Europe. Half of Europe’s states have fallen into recession.

In Portugal this month, the government presented a new draft budget featuring tax increases and new austerity measures. The Portuguese people, relative placid about all of this until now, encircled the Parliament building and denounced the plan—well aware that, because of austerity, the nation’s recession continues to deepen.

On Friday, Spain put out its official jobless rate: 25 percent. That’s a new record. Deputy Finance Minister Fernando Jiménez Latorre acknowledged that unemployed will most likely continue to rise.

Why? Spain, like the rest of Europe, is continuing to eat its peas rather than follow the advice it gives the rest of the world.

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