The reason why austerity measures failed in the Eurozone is that the problems of sovereign debt crisis after the 2008 financial crisis were not caused by policy choices. Following the 2008 crisis, private sector retrenchment occurred and capital account surpluses increased. However, the austerity measures did not target these sectors. Instead, it aimed at the government; hence becoming counterproductive (Blyth 2013). The three financial balances in any economy are government fiscal balance, foreign financial capital (Capital account), and private financial account. The sum of these three accounts should always be zero.In Europe, there is a capital account surplus because the countries import capital to fund their trade deficit. Similarly, the private sector account is always in surplus because business investments are less than household savings (Blyth 2013). Therefore, there should always be a government deficit to make the three to add to zero. The austerity measures which intend to reduce the budget deficit using reduced government spending is therefore likely to cause an imbalance between the public and private sector; hence causing numerous economic and social problems to the affected Eurozone members.One of the worst problems caused by Austerity measures is the macroeconomic problem of unemployment. According to Eurostat (2013), the Eurozone unemployment reached the highest record of 12.1% in 2013. This is because reduced government spending reduced the investment of various sectors in the country. Unemployment has then led to safety net spending and significantly reduced tax revenues for the government. As a result, the austerity measures are offset by the resulting unemployment problem.Austerity measures have also led to reduced GDP in the affected countries. This is because government spending increases GDP, and when the government cuts on spending the GDP declines. In problematic situations like the current Euro zone crisis, consumers and businesses are unable or unwilling to spend (Paul 2013). Therefore, the government should increase its short-term deficit spending in order to stimulate growth in GDP.
Blyth, Mark. 2013. Austerity: The History of a Dangerous Idea. New York: Oxford University Press.
Eurostat. 2013. Euro Area Unemployment Rate at 12.1%. Eurostat Press Office.
Johnson, David. 2014. “Austerity has made Europe’s Depression Longer than in the 1930s.” Common Dreams, http://www.commondreams.org/views/2014/08/24/austerity-has-made- europes-depression-longer-1930s.
Paul, Krugman. 2013. “How the Case for Austerity Has Crumbled.” New York Times. http://www.nytimes.com/2012/04/16/opinion/krugman-europes-economic- suicide.html?_r=0.
Posen, Adam. 2013. “Austerity Has Made Europe's Real Problem Worse.” U.S. News. http://www.usnews.com/debate-club/is-europe-right-to-abandon-austerity/austerity-has- made-europes-real-problem-worse.
Traynor, Ian and Katie Allen. 2010. Austerity Europe: who faces the cuts? London: Guardian News.
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