Newspaper article International Herald Tribune

Europe's Bitter Tonic

Newspaper article International Herald Tribune

Europe's Bitter Tonic

Article excerpt

Fiscal austerity and structural reforms are undermining public confidence in the euro and the European project.

For more than two years, European leaders have pushed a cocktail of fiscal austerity and structural reforms on troubled countries like Portugal, Spain and Italy, promising that it will be the tonic to cure their economic and financial ailments. All evidence shows that this bitter medicine is killing the patient.

Portugal's highest court recently ruled against cuts to the wages and pensions of government employees. Protesters in Spain have picketed the homes of lawmakers to demand better treatment of homeowners behind on their mortgages. And frustrated Italians cast such a large vote for an anti-establishment movement that the country still does not have a new government more than a month after its national elections.

From the beginning, it was clear that austerity (cutting government spending and public benefits) and reforms (relaxing tough labor laws and privatizing state-owned companies) could not be accomplished simultaneously during a deep recession. That painful reality is playing out with no end in sight.

In Portugal, the government of Prime Minister Pedro Passos Coelho cut spending and raised taxes so much that the fiscal deficit has fallen by about a third from 2010 to 2012. He also pushed through reforms to phase out rent control for tenants and legal changes that make it easier for companies to fire workers. The result is that the country's unemployment rate has risen to close to 18 percent, from 12.7 percent in 2011. Economists say Portugal will likely have a bigger fiscal deficit this year than it agreed to in exchange for loans from other European countries and the International Monetary Fund, because national policies, not surprisingly, have made the recession deeper than anticipated. …

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