Tag Archives: Gross domestic product

The reversed psychology of public debt and austerity

Austerity programs have failed consistently during history yet we are using them as an argument to “fix” our crisis. One may argue that austerity shrinks the economy and therefore debt to GDP is even more difficult to reduce if GDP is falling. This becomes more and more clear as we look at the estimates for public debt of some of the austerity countries. Here are some figures published by CEEMEA in their latest Global Business Outlook:

The idea behind austerity is that reduced budget deficit levels will “instill confidence” into the markets but it seems that by undermining growth and destroying consumer confidence it achieves the exact opposite.

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Will Germany drive a recovery in the Eurozone?

Countries using the Euro de jure Countries and...
(Photo credit: Wikipedia)

The recovery and long term sustainability of the Eurozone is currently reliant on strong German growth, continued ECB intervention, sustained investor confidence in Greece and political stability, none of which are certain.

It looks like Germany is the largest and strongest economy in the Eurozone. It makes up 28% of Eurozone GDP and grew at 3% in 2011 adding 0.8 percentage points to Eurozone growth in that year. The performance of the German economy is important as it provides demand for exports from other Eurozone countries and acts as a bellwether for the Eurozone as a whole. Net export growth (exports minus imports) makes a considerable contribution to German growth, around 0.8 percentage points in 2011. This is based on strong trade relationships with the US, Brazil and the rest of Europe. A PwC report on Eurozone shows that exports to Brazil and the US made the biggest contribution to growth in 2010 and they expect this trend to continue in 2012, although slowing growth in Brazil is likely to reduce its contribution.

Many forecasts show that the German economy will grow modestly in 2012. However, should the German economy tip into a recession, this would compound the problems in the rest of the Eurozone.

What do you think?