The high cost of austerity

David Brancaccio Jan 30, 2012

The Greek word for trouble” is pronounced “PROH-vlee-mah.” And for players in financial markets today, Greece’s financial troubles were front and center again. Armed with a treaty on curbing budgets and a huge bailout fund, European leaders held a half-day summit in Brussels today to restore order to the eurozone, and it worked. EU leaders walked away with a signed agreement that could help prevent a future debt crisis in the region. Problem is, if Greece and its bondholders can’t reach a deal soon, what they’ll have in their hands is a messy default of a European country.

Some experts say the real question is less about economics and more about politics. That is, how long people in Greece, and other shaky euro-zone countries, can endure the austerity being handed to them by the rest of Europe.

Matthias Matthijs, a professor of political economy at both the Johns Hopkins and American Universities, says, “The human cost [of austerity] is always forgotten.” He isn’t surprised the Greeks are resisting the appointment of a EU budget czar to oversee their finances. Greece is being asked to cut 150,000 public sector jobs in a country with just over 11 million residents.

Matthijs says some of the countries in the most trouble, Spain, Portugal and Greece specifically, were under authoritarian regimes just a few decades ago. Now, they’re facing draconian measures. “Some people are taking about five or ten years of austerity for Greece,” says Matthijs. “That’s simply too much to swallow for modern democracies.”

According to Matthijs, the U.S. is not in a position to look the other way: “The eurozone crisis is the biggest threat to the very fragile recovery here in the U.S.” With all of the financial globalization in the past 30 years, U.S. banks are heavily linked to what goes on in Europe. He warns that defaults by European countries could cause the “dominos to fall.”

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