By Teresa Welsh |
The Organization for Economic Cooperation and Development said this week in its bi-annual update that Europe's ongoing economic woes still pose a threat to worldwide economic growth. The Organization predicts that the eurozone economy will contract by 0.6 percent this year, a serious deterioration from the 1 percent growth that it had previously predicted for 2013.
In light of the constant string of bad economic data, many European leaders have changed course away from austerity, the spending cuts and tax increases that were meant to stem the continent's crisis and ignite confidence in the eurozone's ability to deal with its problems. Instead, several countries – including France, Spain and Poland – have received permission to ditch their budget targets and run bigger deficits in an attempt to boost job creation. (But they are still being forced to adopt labor market reforms.)
As Reuters' Neil Unmack put it, "This loosening is an inevitable surrender to reality," as countries face growing unrest over continued high unemployment. The leaders of France and Germany are meeting today in an attempt to find a way forward; France's socialist President Francois Hollande has been one of the loudest critics of austerity, while German Chancellor Angela Merkel has been one of its staunchest supporters.
The theory underpinning the push for austerity was dealt a body blow last month when an influential study by economists Carmen Reinhart and Kenneth Rogoff was found to have serious problems, including an Excel error. But the two economists have rebutted their critics' charges, leading to a back-and-forth with, most prominently, the New York Times' Paul Krugman, a vigorous opponent of austerity. And as Michael Rosen detailed in The American, austerity still has plenty of defenders, including Mario Draghi, president of the European Central Bank, who said earlier this month that "governments should not unravel [budget cutting] efforts."
So is Europe right to abandon austerity? Here's the Debate Club's take:
Veronique de Rugy Senior Research Fellow at the Mercatus Center at George Mason University
Dean Baker Codirector of the Center for Economic and Policy Research
Gordon Gray Director of Fiscal Policy at the American Action Forum
David Callahan Cofounder of Demos