A dog wrapped in a jacket sits on a London pavement: has a
flawed
economic policy based on what is called the '90-percent rule' plunged
Europe into yet another downturn? That is the conclusion that has
believers in austerity backpedaling, and is the result of the
work of a
U.S. graduate student.
American
Student Overturns Europe's Austerity Applecart (TagesAnzeiger, Switzerland)
"For
quite some time now, there has been a commitment to hard-line economic
austerity in the form of the so-called 90-percent rule. ... A student named
Thomas Herndon recalculated figures from star economists Carmen Reinhart and
Kenneth Rogoff, discovering that the pair had
committed an embarrassing computing error. ... This means that the supposed
scientific foundation on which austerity was built, has collapsed.The 90-percent rule is now obsolete."
Graduate student Thomas Herndon of the University of Massachusetts Amherst: Hernden appears to have stumbled upon one of the most damaging economic miscalcultions in years, rendering the economic policies of some of the world's most developed nations obsolete.
For years, Berlin and Brussels have demanded that indebted
southern Europeans tighten their belts. That's over now - and the spectacular
change was triggered by an American student.
European Commission President Jose Manuel Barroso
is considered an economically-liberal politician who wants to cut Europe's debt
mountain by implementing tough austerity measures. On Monday, to the surprise
of many observers, he announced: "Of course, while a policy of austerity
is fundamentally correct, it has reached its limits. A successful economic
policy must be more than theoretically correct. It also requires a minimum of
political and social support."
Olli Rehn, the E.U.'s
senior economic commissioner, is considered a tough customer and the chief
ideologue for the austerity policy Brussels has adhered to since the Greek
crisis. He, too, has back-pedaled considerably over the past few days, granting
deficit “sinners” Greece and Portugal one-year extensions for reaching their
austerity savings goals.
The basis for this policy was the 90-percent rule.
For quite some time now, there has been a commitment to hard-line
economic austerity. That policy has now suddenly been softened. That
development has been triggered by a study conducted at a Massachusetts state
university [University
of Massachusetts Amherst]. There, a student named Thomas Herndon
recalculated figures from star economists Carmen Reinhart and Kenneth Rogoff, discovering that the pair had committed an
embarrassing computing error. That may now have tremendous consequences, because
Reinhart/Rogoff used this data to substantiate the
so-called 90-percent
rule, which says that a nation’s economic growth rapidly declines when
government debt rises above 90 percent of Gross Domestic Product.
This rule was then used repeatedly by the apostles of
austerity - for example Olli Rehn - as a justification
for austerity. The two star economists have now admitted their miscalculations.
In other words, the 90-percent rule is obsolete. This means that the supposed
scientific foundation on which austerity was built, has collapsed. To be fair,
we should briefly mention here that the 90-percent rule has always been controversial
among economists.Keynesians like Paul Krugman and Joseph Stiglitz have always
dismissed it as nonsense. For this reason, it is less the discovery of the
mathematical error than the timing of the discovery that has reversed this
trend.
Wolfgang Schäuble's sudden compassion
So now it is clear: The European Union's policy of austerity
has failed - and the political consequences can no longer be concealed. In the
deficit countries, these economic policies have not improved the situation. On
the contrary, they have led to a downward spiral into impoverishment: Unemployment
and government debt have risen. There can be no suggestion of an upturn. Over
the last five quarters, the European economy has shrunk, and prospects for the
future are bleak. Whether it be the International Monetary Fund, the OECD, or
the European Central Bank, all have again revised their growth forecasts
downward.
Posted By Worldmeets.US
And it is no longer just the deficit “sinners” who are stuck
in the mess. Although there have been massive cuts in government spending and a
rise in taxes, at least six eurozone countries are
expected to exceed the three percent limit for new debt.That includes France and the Netherlands. Which
is why Berlin has a big problem. A small country like Cyprus can be forced to
comply, but not France or Holland. Angela Merkel and her finance minister, Wolfgang
Schäuble, will have to make concessions - and apparently,
they are partly willing. During the Bundestag debate, Schäuble
even expressed something like compassion for the people in Greece, Spain,
Portugal, and Italy: “They live in very hard times,” he explained.
Will the crisis last
another decade?
In Germany itself, however, such an understanding is
politically risky. The anti-Europe party, Alternative
für Deutschland, is on the rise, and hardliners
are anything but appeased.
“Overcoming the crisis ... will remain a challenge over the
next decade,” Deutsche Bundesbank President Jens Weidmannwarned
in the Wall Street Journal. And according
to Weidmann, a reversal of German economic policy in
the direction of higher wages and more inflation would be pointless. “Our
analyses show that increased demand in Germany would have little effect on the southern
European economies,” he said.
