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Draconian austerity measures do not work


Themes: Economics and policy

A leading Cambridge economist today warns that austerity programmes linked positively to structured steps and discipline at a macroeconomic level are needed to revive flagging European economies: austerity on its own does not work

Dr Christos Pitelis, a Reader in International Business & Competitiveness and Director of the Centre for International Business and Management (CIBAM) at Cambridge Judge Business School, says governments, faced with deep and rapid austerity cuts simultaneously try to improve the structural competitiveness of their economy.

Output spirals downwards and the economy fails to recover. At this point, he says, it is now widely recognided that an austerity-only policy is bad.

Dr Pitelis insists the problem is as much political as it is economic. Lending countries like Germany where, a decade ago, wage cuts or small pay rises were accepted and the country achieved more than any other ‘when everybody else was having a party and enjoying growth’.

The German electorate is correctly unhappy at being expected to bail out others and is being pacified by the buying of time. For example, in Greece, private sector initiatives, extension of rescaling deadlines, reduction of interest rates but without an ‘official sector initiative, a proper reduction of debt’.

In an interview for Cambridge Judge Business School’s website, Dr Pitelis points out that the International Monetary Fund (IMF) has warned that the problem will not be solved without a reduction in debt.

“Moving in this direction is politically lethal for a number of countries and this is a dilemma. My feeling is that eventually we will move in this direction especially when more economies have undertaken the steps they have promised to take and the problem is not so huge any more.”

He adds that Germany has done well for itself and for Europe as a whole by implementing a competitiveness strategy around low costs and improved quality of products and services. The emergent model – value-for-money goods and services – should be followed by all.