The Implementation Of Austerity Measures Economics Essay

The implementation of Austerity measures in Europe resulted into a recession in 2010/2011. However, Germanys economy continued with growth over the years 2011 and 2012 and although the Germany government has been known as a great advocate of Austerity measures, it has at times increased its expenditure but its growing revenue has worked to moderate the deficit unlike in many other European countries. In addition, Germany was able to maintain growing revenue to moderate expenditure increase as it never sought to stimulate its economy through tax cuts becoming a model of fiscal prudence which moderates deficits by keeping revenues high. (Euro stat, 2013)

Germany is one of the largest economies in the Euro zone with a growing economy and low unemployment. The country was able to pull itself out of the global financial crisis and has maintained a booming economy and advocates Austerity measures for the peripheral economies in Europe. However, the country is currently experiencing high inflation due to its bid to aid the peripheral economies and having its economy currently stalling with stagnated industry sales and reduced foreign demand for its products.

Five year trends

Year

GDP

Billion Euros

Unemployment

%

Inflation

%

National debt

As % of GDP

National deficit

As % of GDP

HICP

%

2012

2,643.90

81.70

2011

2,592.60

6.00

2.30

80.50

-0.80

2010

2,496.20

7.40

1.10

82.50

-4.10

2009

2,374.50

7.50

0.30

74.50

-3.10

2008

2,473.80

7.80

2.70

66.80

-0.10

Source: Euro stat 149/2012.

Debt vs. deficit and Austerity

Debt refers to the amount that a government borrows to sustain its expenditure in the case where its spending are in excess of its revenue while deficit is the excess of budget spending above the available revenue. In relation to Austerity, deficit is more critical as the measures are sought to directly control the government spending hence the deficit by cutting on the expenditure.

How Germany got into the situation

For Germany, being in the current financial and fiscal crisis is both by bad luck and poor choices. When a common European currency was created in 1992, the control of Banking, Finance and Fiscal policy was left in hands of national governments; a system that succeeded in generating massive economic growth in Germany and Euro zone. However, the massive buying of the sub-prime loans system in US by the European Banking including Germany was one cause of the problem as the Germany’s banks kept on buying on the US system even when the sub-prime market was collapsing in 2007.

On the other hand, the inability of the other European peripheral countries to deal with the financial crisis resulted to the problem’s spill over to the German’s economy. This has negatively affected the country as it seeks to aid the economies out of the situation sometimes paying higher prices in terms of inflation.

Who holds most of the debt

With its total current debt as a percentage of GDP at 278%, Germany’s non financial corporations and financials are the greatest holders of the debt with 87% each while the government’s debt is 83%. On the other hand, household’s debt stands at 49%. This means that the largest holders of the Germany’s debt are Financials and non financial Corporations followed by the government while households are the least debt ridden.

Recommended steps:

Finding a solution to the fiscal challenge facing Germany and other European countries has resulted to various remedies being fronted by different stakeholders ranging from the governments to the lenders and other European leaders. For Germany, the following has been recommended.

Germany government

The Germany’s government in the leadership of Angela Markelel under the conservative Christians Democrat has since 2005 been adamantly insistent of Austerity programs. For instance, there was a proposed budget cut in 2009 in a bid to reduce the budget deficit by 80 billion Euros to a 3% of the GDP by 2014. The proposal involved reduction on welfare spending over a period of four years as well as raising taxes on nuclear plants operators and air travel. There was also a proposed cut on public sector payroll to a tune of 15,000 by the year 2014 as well as a reduction on military spending by cutting the armed services by up to 40,000 troops. In addition, the Germany government advocates the fiscal compact in which all the European countries are meant to maintain balanced budgets in order to stabilize the region’s economy. (Pietras, 2009)

Opposition

German’s opposition has been against Austerity measures and in alternative recommending increased efforts to create jobs and spur economic growth in Germany and Europe as a whole by increasing government spending but retaining high government revenue. (Boston, 2012)

Euro leaders

European leaders are opposed to the Austerity measures and recommends implementation of fiscal policies that provide growth incentives that should accompany the budget slashing rather than the Austerity measures advocated by the Germany government. (Boston, 2012)

European Central Banks/IMF/International banking houses /lenders

Germans reaction to proposed Austerity package

The Austerity measures have been faced with great resistance both from within Germany and outside. The Social democrats who are Germany government’s opposition are opposed to the proposed Austerity measures as well as the ratification of the Austerity fiscal package for the European countries. The possible results of the measures including reduced welfare benefits and cut on jobs are facts that Germans take into consideration in their opposition to the programs which would deny welfare benefits to those who need them most at time when it is most needed. The wage earners are also likely to be the most affected hence their great opposition for the measures. Resistance for Austerity measures has also been widely felt from other countries like Greece where there were widespread street demonstrations as people voiced their opposition to the measures. In addition, elections in Italy were highly bent on voting out the proponents of the Austerity measures and voting in those who spoke out against the measures.

Outcome prediction and fairer & effective alternatives recommendations

Some of the limitations of the Austerity measures are the likely results including reduced GDP growth hence resulting to even great debt GDP ratio which undermines the country’s ability to service its debts hence the liquidity problems being likely to escalate to more solvency crisis. Austerity measures would also result into high unemployment as the programs advocates cutting several jobs in the civil service while the cuts on jobless benefits would negatively impacts on the welfare of the jobless. In addition, it would result to some stimulus such as business subsidies being done away with negatively impacting on Germany’s competitiveness in the international market. Austerity measures would also result into low income in short-term while wage earners suffer most and long-term unemployment.

Alternative fairer measures would be stimulus programs which would increase government spending hence debt but with continued retention of high revenue. By keeping the GDP growing, the debt GDP ratio would remain constant without hurting the economy and its people. Another alternative to the Austerity measures would be focus on investments in public infrastructure like health and education and jobs creation which should be funded through fair and reasonable taxation.