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Europe faces up to the cost of austerity

Christopher Werth Feb 22, 2013
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Europe faces up to the cost of austerity

Christopher Werth Feb 22, 2013
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Italian voters go to the polls this weekend. Former Prime Minister Silvio Berlusconi is in the running to replace the technocratic government that was meant to bring stability to the financially troubled country. But as the election nears, Italy faces an even tougher euro zone economy than it thought.

Today, the European Commission said the euro zone will shrink another 0.3 percent in 2013, which is deeper and longer lasting than originally expected. Growth is not forecasted to return until the end of the year.

“It does confirm that I think that austerity is perhaps having a negative effect on the major economies of the euro zone and indeed the small economies of the euro zone,” says Jonathan Loynes of Capital Economics.

Growth in France has flatlined. Italy will contract by a full one percent this year — twice the estimate just three months ago.

Nicholas Spiro of Spiro Sovereign Strategy says the euro zone needs a change in policy away from cutting government spending and cutting taxes.

“Europe is condemning itself to years of sub par growth after an extremely brutal and savage downturn,” Spiro says.

But not all of the euro zone countries are in the doldrums. Germany should grow by a half a percent this year. And optimism among German businesses is on the rise.

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