Weakening in Eurozone Economy, Written

¶ … weakening in Eurozone economy," written by D. Jolly and M. Eddy and published in the New York Times on October 30, 2012. The article discusses weakness in the Eurozone, specifically declining GDP in Spain and a flatlined unemployment rate in Germany. European leaders were meeting to discuss solutions to the problems. Consumer sentiment is Europe also fell, and there were predictions that the Eurozone economy was going to contract 2.5% next year. A number of problems contributed to this situation, ranging from the bursting of the housing bubble in Spain in 2008 to austerity measures that have slowed recovery. The European leaders, however, were still proposing that business and consumer confidence could be restored to markets through further rounds of budget-cutting. The authors noted that budget-cutting obsession in Germany was hindering growth throughout the Eurozone.

Analysis

The article's timeline essentially begins with the onset of the financial crisis, which included the bursting of the housing bubble in Spain. Essentially, real estate prices grew rapidly in Spain, and the construction industry boomed as a result. This provided Spain with a boost in GDP and employment. When the real estate bubble burst, Spain's GDP plunged and unemployment grew. As a result, Spain began to have severe budget shortfalls. A similar situation occurred elsewhere in the Eurozone.

The main overarching issue is how to best deal with conditions of slow growth cause by financial crises. In Europe, where national governments set fiscal policy but the European Central Bank sets monetary policy, several governments have struggled to get their economies back on track after the 2008-2009 recession. The policy prescriptions, especially of the central bank, have been dictated in large part by Germany, the largest economy in the Eurozone. These policies have focused on austerity measures to balance these budgets. The problem is that austerity measures increase unemployment and reduce GDP as per the GDP accounting identity (G+I+C+X-M = GDP). Youth unemployment is mentioned specifically, and is a structural problem in many European nations because the lack of good work experience at an early age will put these workers in a disadvantage for their entire lives. With low government spending, low business confidence, low consumer confidence, there is little hope for any serious economic recovery, hence the predictions of a 2.5% decline in Eurozone GDP. The reality is that Germany is proposing solutions for unbalanced budgets, when the real problems are stagnating GDPs and high unemployment. This mismatch between the problems and the solutions has led to the problems being exacerbated, a situation compounded by the erroneous logic that budget-cuts, as opposed to increased demand, are the source of confidence in the marketplace. That logic is not founded in any credible, tested economic research. Business investment is driven by demand, not by ideologically-driven fiscal policy.