Friday, April 26, 2013

ECB says ditching austerity would not help Eurozone

Reuters reports that ECB officials are saying that ditching austerity would not help the Eurozone economy very much.

Whether this is true or not, what would definitely help the Eurozone economy is if the Swedish Model was adopted and banks were required to recognize the losses on the excess private and public debt in the financial system.

This would lift the burden of servicing this excess debt from the real economy and end the diversion of capital needed for growth, reinvestment and supporting the social contract.  As a result, the downward spiral the Eurozone economy is experiencing, particularly in countries like Spain and Greece, would end.

ECB policymakers rebuffed suggestions that Europe should ease up on austerity and said that while the central bank has room to cut interest rates, such a move would not necessarily help the economy much. 
European Central Bank Vice-President Vitor Constancio said that seeking to stimulate economies by stopping measures aimed at cutting government debt could merely increase countries' borrowing costs rather than triggering growth.... 
With budget cuts blamed for a second straight year of recession in the euro zone, the EU's top economics official Olli Rehn indicated over the weekend that more flexibility on tough economic targets was needed. 
His boss, European Commission President Jose Manuel Barroso, said on Monday that austerity had reached its natural limits of popular support....

But ECB policymakers did not accept that weaker growth was a reason to change course on reform, insisting that more balanced budgets were essential to revive sustainable growth. 
"Economic adjustment, both internal and external, has been significant, has implied high costs in terms of unemployment and should not (be) put into risk of unraveling now," Constancio told the European Parliament. 
Joerg Asmussen, who sits on the ECB's Executive Board, also spoke of a risk of slipping back and warned against taking the current market calm for granted. 
"(A) sound fiscal condition is really a precondition for growth," he told the Financial Times. "If one postpones fiscal consolidation to a later day, that comes not without risks."

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