Big debt cuts haven't helped Europe

Debt burden climbs for nations with austerity focus

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WASHINGTON — Europe has endured layoffs, wage cuts and tax increases to bring government debt under control. So where’s the gain?

Far from falling, debt burdens are rising fastest in European countries that have enacted the most draconian austerity programs, according to The Associated Press’ Global Econ­omy Track­er, which monitors the performance of 30 major economies.

The numbers back up what many analysts say: Austerity can be counterproductive and even make a country’s debt load grow.

Many fear the cutbacks will cause Europe to sink into a self-defeating spiral: Higher debt leads to harsher austerity, growing social instability and deeper economic problems. Governments could find it even harder to pay their bills.

The pain is already intense. Por­tu­gal’s unemployment hit a record 14 percent at the end of last year. Ireland’s economy contracted a worse-than-expected 1.9 percent in the July-September quarter of 2011.

Under a deal approved Tuesday by the 17 countries that use the euro and the International Monetary Fund, Greece will get a $172 billion bailout in exchange for accepting another dose of austerity that includes laying off 15,000 civil servants and slashing the minimum wage 22 percent.

Progress has been made in the bond market, where interest rates on government bonds have declined. That’s made it cheaper for some indebted countries to borrow.

But the drop in rates might not last. And the lower rates probably have less to do with budget cutting than with what the countries’ central banks are doing: They’re buying bonds, which pushes down rates, and providing low-cost loans for banks to do the same.

The best way to compare debts among countries is to look at government debt as a percentage of gross domestic product. A percentage over 90 is considered bad for an economy’s health. The AP’s Global Economy Tracker found:

• Portugal cut pensions, reduced public servants’ wages and raised taxes starting in 2010. Yet in the third quarter of 2011, government debt equaled 110 percent of GDP, up from 91 percent a year earlier.

• In Ireland, middle-class wages have been reduced 15 percent and the sales tax boosted to 23 percent (the highest in the European Union). But its debt amounted to 105 percent of economic output in the third quarter of last year; a year earlier, it was 88 percent.

• In Britain, Prime Minister David Cameron staked his political future on his austerity plan. Government debt ratios, though, reached 80 percent in the third-quarter of 2011, up from 74 percent a year earlier.

• In Greece, two years of austerity programs have devastated the economy. The government’s debt equaled 159 percent of the country’s GDP in the July-September quarter of 2011. That was up from 139 percent a year earlier.

Norway, by contrast, has a strong economy and has avoided painful austerity measures. Its debts dropped to 39 percent of GDP in the third quarter, from 43.5 percent in the same quarter of 2010.

Researchers at the Kiel Institute for the World Economy estimate Greece would have to turn its annual deficit – now about 5 percent of GDP before debt payments – into a daunting surplus of around 30 percent of GDP to return to financial health.

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seenitB4 02/22/12 - 07:44 am
The flow of immigrants into

The flow of immigrants into these countries has drained some many can they really help anymore....

The in-flows of migrants during the 1980s and 1990s – the second great migration of the 20th century – has literally changed the face of America. In 1970 the US population was 5% Hispanic, 1% Asian and 12% black. A recent projection indicates that by 2050, it will be 26% Hispanic, 8% Asian and 14% black.

Immigration in the US is embraced more enthusiastically by the free market right than the trade union left, but it has brought real benefits. Immigrants contribute to innovation – witness the number of foreigners in Silicon Valley. And they do jobs that native workers refuse, such as sustaining Californian agriculture. But in his new book, Heaven’s Door, Harvard economist George Borjas claims that the economic benefits brought by the latest 20-year wave of immigrants are more disputable. He points to the fall-off in skills relative to those who emigrated to the US in the 1950s and 1960s. He argues that America should admit only 500,000 immigrants per year, and select the most highly skilled. These are criteria which, he acknowledges, would have prevented him, a refugee from Cuba, from immigrating in the early 1960s.

We will face the same problem sooner than we think..imo.

raul 02/22/12 - 05:40 pm
So, what is the answer, spend

So, what is the answer, spend their way out of a recession?, as suggested by VP Biden a couple of years ago. That worked really well, didn't it? 700 billion dollar stimulus flushed down the toilet.

Little Lamb
Little Lamb 02/22/12 - 05:55 pm
Do these Associated Press

Do these Associated Press writers think their readers are economic illiterates? Well, perhaps most are, but not Little Lamb. Come on, folks, of course the debt ratio will go up temporarily under austerity. That is because the debt stays relatively the same but the GDP goes down as the austerity kicks in. If they stick with it, things will get better; but it's painful at first.

We'll be facing it soon enough in the United States.

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Remember your fourth grade arithmetic. If the numerator (debt) stays the same and the denominator (GDP) goes down, the ratio goes up.

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BTW — the headline of this story does not match the content. There has been very little if any debt cutting in Europe. Once again, the story is about the debt load or debt/GDP ratio. But, then again, many editors are indeed economically illiterate.

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