A good Howard Schneider article in The Washington Post asks “Is Austerity Killing Europe’s Recovery?” and basically answers yes.
It’s hard to see how it could be any other way. The Eurozone, before the crash, was conveniently very close to having no net trade surplus or deficit. But the bloc as a whole contained a lot of internal imbalances. Nothing necessarily wrong with that, I bet that if you looked at the USA as 50 separate countries, we’d have internal imbalances too. Certainly the Eurozone did. Several countries (Germany, Austria, Netherlands, Finland) were producing more than they consumed. France was, I think, about at balance. And other countries (Spain, Portugal, Ireland, Greece, Italy) were consuming more than they produced. The reason they were able to do that is that property values in those countries was increasing, which was making people eligible for bigger loans. In the aggregate, Germans were lending money to Spaniards so the Spaniards could buy stuff that’s made in Germany. The result — consumption for Spain, jobs for Germans.
Then property values declined, the lending boom stopped, and the construction sector drew to a halt. Spanish consumption, in other words, started to plummet. Also, tax revenue started to plummet and deficits ballooned. The EU response to this has been to say that Spain, Portugal, Ireland, Greece, and Italy all need to raise taxes and cut spending to avoid debt crisis. You can see the logic. If debt is a problem, then higher taxes and less spending are the solution. But the deficits were driven by cratering growth. And that means you need some growth path for these countries. That could have been fiscal stimulus to offset falling private consumption. It could have been loose money from the ECB to offset the contractionary trends. It could have been some deliberate effort in Germany to get consumption to grow faster than production and “rebalance” the economy. But we haven’t gotten any of that. We’ve got declining Greek demand plus declining Irish demand plus declining Portugese demand plus declining Spanish demand plus declining Italian demand. In the aggregate, those countries are very important to the Eurozone and sending them down the tubes can’t help but start tugging France and Germany down eventually.