Eurozone Crisis: The pain in France and Spain

28th September 2012

The crisis continually sparks back into life, and while it has fortunately failed to fully erupt into catastrophe, it seems on a never-ending road of austerity, without a defined solution.

Euro doom time once again

Wasn't Europe supposed to have fixed itself by now?

One austerity package after another; this is the merry-go-round that has characterised the past few years. And this week Spain's beleaguered government delivered a fifth austerity package against a backdrop of sky-high unemployment, deepening recession and violent protests on the streets.

Spain is chasing its tail into fiscal and economic meltdown believes Shaun Richards, Mindful Money's economist blogger: "I find myself returning to the central theme of Euro area austerity which is that austerity begets economic weakness which begets more austerity and more economic weakness and so on.

"So far there is no sign of any change in this in Greece which has gone the furthest down this path which gives us a disturbing and worrying road map for Spain's future."

Meanwhile, the Washington Post adds: "The short answer is that nothing really has happened. Europe's problems were lurking there all along. They just got papered over temporarily."

So while the pledge by Mario Draghi, European Central Bank president, was welcome at the end of July to do "whatever it takes" to preserve the euro, the situation appears to have gone into reverse.

There are angry street protests in Spain against fiscal austerity, strikes in Greece, political tension between northern and southern Europe over shoring up the continent's banks. The crisis is back in full force.

Spain has set out its austerity budget for 2013, with new spending cuts but protection for pensions, amid a shrinking economy and 25% unemployment, while expectations are growing that it will seek a bailout from it Eurozone partners, says the BBC.

Meanwhile, France has unveiled its harshest budget in 30 years, says the Financial Times (paywall) piling €20bn in new taxes mainly on big business and the wealthy as it stuck to its promise to hit its ambitious budget deficit target next year despite faltering growth.

Are we amid yet another eurozone firestorm?

A spokesman for Henderson Global Investors says: "Most of Europe is now facing severe austerity measures; which implies that the prospect of reaching strong levels of economic of growth, last seen before 2008, is much lower.

"Whereas the priority should be to encourage spending, investment and growth, lack of available options are forcing European governments to focus on the wrong issues, resulting in the balance being strewn towards a long period of stagnation and lower living standards.

"While it is crucial to address the issue of debt, the right balance must be struck. Actions by the central bank may buy time but the governments themselves have to pave the road to recovery."

Paul Krugman offers up reminder of the euro zone's core problems, and says that what countries like Spain, Greece and Italy need to do is bring their labor costs and prices back down to competitive levels. Typically, countries do that by devaluing their currency. But these countries don't control their own currency, since they're all tethered to the euro, so they have to work out a strategy.

Meanwhile, sanjait comments on a Washington Post blog: "If this were 2009-2010, we could maybe excuse those in Europe (and elsewhere) who believe that somehow economic recovery and government austerity are compatible in the current economic climate.

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