Critical Review – Book Report/Review Example
Panic driven austerity in the Eurozone and its implications It is clear that countries from the Southern part of Europe were coerced to introduce austerity measures in 2011 in order to try to solve the Eurozone crisis. The forces behind the introduction of the austerity programs are because of the declining economic essentials and the panic and fear that arose in the financial markets. The austerity measures had serious implications to the countries that adopted them.
The article shows that the fear and panic in the financial markets forced the countries that were affected to introduce austerity measures. For instance, Greece was highly affected and as such, it was forced to introduce server austerity programs totaling to more than 10% of GDP per capita while countries like Germany were not affected and hence, did not introduce any austerity measure. Therefore, it can be concluded that financial markets wielded distinct degrees of pressure on European countries.
Some theories have been used to explain the spread of the austerity measures. On one hand, there is the notion that the increasing spreads witnessed from 2010 to 2012 were because of diminishing fundamentals such as external debt, competitiveness, and government. Therefore, the spreads could only be decreased if the fundamentals are enhanced mainly via austerity measures that focus on decreasing government debts and deficits. On the other hand, there is the conception that the spreads were because of fear and panic. This implied that the spreads were driven away from the fundamentals like in the stock markets that can be influenced by bubble pushing them away from the fundamentals. In such times of market fear and panic, central bank has to offer liquidity.
ECB made a wise choice to endorse the government bond market since it managed to drive away the fear and panic that Eurozone was about to collapse. The strong trading in government bonds led to decrease in the spread of austerity programs in States in Eurozone.
Countries that exerted austerity measures witnessed their GDP decrease rapidly which implies that austerity programs that policy-makers and markets introduced generated recessions and led to increased debt-to-GDP ratios. This in turn affected these States to continue paying their debts. As a result, the liquidity crisis that influenced this situation might produce solvency crisis.
Summarily, since the Eurozone crisis began, financial markets offered diverse views on what caused the crisis. For instance, fear and panic in Greece accelerated the spread of austerity measures. Although, the ECB responded, it was too late in that most countries had already implemented austerity measures and the prices on the stock markets were crushing. Additionally, panic and fear should not be used as directives and guides for economic policies since they quickly led countries to apply austerity measures that plunged these countries into recession. The financial markets did not alert the Northern European to activate their economies, which led to deflationary discrimination that caused double recession.
Grauwe, Paul. Panic driven austerity in the Eurozone and its implications. Web. 6 March 2013.