The imposition of austerity measures in the context in which countries slip into recession is the wrong approach, considers the American economist Joseph Stiglitz, who won the Nobel Prize for Economics in 2001. Although there is increasing evidence that austerity only leads to the collapse of economy, politicians answer is the same: more austerity! What is happening now in Europe is a “collective suicide pact”, warned U.S. analyst in the Asian Financial Forum, which brought together more than 2,000 economists, businessmen and government officials in Hong Kong.
In addition, he noted that austerity is not conducive to trust. “There will be no restoration of confidence as long as economies continue to fall, and this will happen until politicians will change the course of the economy. And I think that’s unlikely”, added the analyst. The principles of Keynesian economics were stating that is the role of government to help sustain the demand and the austerity measures should be taken when the economy is booming, not when it’s declining.
Instead, Stiglitz believes that the best “economic therapy” is expenditure in infrastructure, particularly transport and energy projects. In this respect, he gave the example of China, a country that has successfully fought the financial crisis with fiscal stimulus packages. What economists debate now is not whether the eurozone will break up, but how and when that will happen. “The discussions between economists is limited to the best scenario for the euro to be terminated. Popular uprisings could help the euro’s termination. In Spain, youth unemployment reached 40% in 2008. How long will they tolerate this situation?”, Stiglitz asks himself. He also pointed to the fact that, “when the euro was founded, most economists were skeptical” and “the politics were not strong enough” to support it over time. Another time for the euro to be killed is when the European Central Bank refuses to be lender of last resort for some countries.
Joseph Stiglitz also criticized the rating agencies, however he thinks that the decision to downgrade the EFSF (European Financial Stability Fund) was reasonable: “The EFSF was trying to leverage something out of nothing, and that was never going to work, and they were just saying that it wasn’t going to work”.
