European austerity has already proven a terrible failure, driving the continent as a whole back into a recession and pushing unemployment to record levels. Despite promises from leaders across Europe that reducing deficits would spur growth, that hasn’t been the case. And worse yet, the focus on austerity hasn’t even led to the deficit reduction many European countries are chasing.
The United Kingdom has fallen far short of its deficit reduction goals, and France is likely to miss its deficit reduction targets too. Today, Fitch ratings announced that Spain too had missed its target, and it will miss its 2013 target thanks to a lack of economic growth:
Spain to miss 2013 deficit target of 4.5%, due to 1.6% GDP fall, says Fitch. Deficit to be 6%/GDP, debt to peak in 2014-2015 around 96%/GDP.
— Jamie McGeever (@ReutersJamie) February 21, 2013
Though European deficits are declining, they are doing so far more slowly than projected thanks to a lack of economic growth that has made much of the deficit reduction policies counterproductive. European countries continue to cut spending to reduce deficits, causing more fiscal contraction that in turn slows down deficit reduction efforts or, worse, makes deficits larger. When the United Kingdom, which has the economy most comparable to America’s, instituted its first round of austerity in 2010, it projected its deficit would fall from 4.8 percent of GDP to just 1.9 percent. Instead, the country is on the brink of a third recession and its deficit stands at 4.3 percent of its economy. In other deficit-focused countries, unemployment has skyrocketed — Spain’s unemployment rate topped 25 percent in January.
The United States originally approached economic recovery by focusing on stimulus instead of deficit reduction, a path that led to a stronger recovery than Europe’s. But it too has since embraced deficit reduction, the most serious round of which looms on March 1 when sequestration will begin taking effect. Those spending cuts could knock 0.6 percent off of annual economic growth while costing the nation 700,000 jobs. Drops in federal spending have already hurt the recovery, and if Europe is any indication, efforts to rapidly reduce the deficit will likely serve only to reduce growth and complicate deficit reduction efforts instead.