Reply #15: Europe's Austerity: Like Something Out of the Brothers Grimm

[Demeter]

http://www.truth-out.org/europes-austerity-like-something-out-brothers-grimm68580..


...It is an interesting story, a sort of Grimm’s fairy tale for the 21st century, but it bears about as much resemblance to the cause of the crisis as Cinderella’s fairy godmother does to the International Monetary Fund (IMF).

While each country has its own particular conditions, there is a common thread that underlines the current crisis. Starting early in the decade, banks and financial houses flooded real estate markets with money, fueling a speculation explosion that inflated an enormous bubble. In climate and culture, Spain and Ireland may be very different places, but housing prices rocketed 500 percent in both countries.

The money was virtually free, with low interest rates on the bank side, and cozy tax deals cut between speculators and politicians on the other. That kept the cash within a small circle of investors. While Bavarian workers were watching their pay fall, German banks were taking in record profits and shoveling yet more capital into the real estate bubbles in Ireland and Spain. The level of debt eventually approached the grotesque. Ireland’s bank debts, if translated into dollars, would be the equal of $10 trillion.

The Wall Street implosion in 2008 sent shock waves around the world and popped bubbles all over Europe. While nations on the periphery of the European Union (EU) tanked first—Iceland, Ireland, Latvia, Romania, Hungary, and Greece, economies at the heart of the EU—Britain, Spain, Italy, and Portugal—were also shaken. According to the Financial Times (FT), total claims by European banks on the Greek, Irish, Italian, Spanish and Portuguese debts alone are $2.4 trillion.

The European Union’s (EU) cure for the crisis is a formula with a long and troubled history, and one that has sowed several decades of falling living standards and frozen economies when it was applied to Latin America some 30 years ago. In simple terms, it is austerity, austerity and more austerity until the bank debts are paid off.

There are similarities between the current European crisis and the 1981 Latin American debt crisis. “In both cases debts were issued in a currency over which borrowing countries had no control,” says the FT’s John Rathbone. For Latin America it was the dollar, for Europe the Euro. Secondly, there was first a period of easy credit, followed by a worldwide recession...