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No pain, no gain for Eurozone

Spending cuts hurt, but the alternatives are worse

Gulf News

It appears that earlier economic numbers from the Eurozone, flattered to deceive. The European Commission has predicted that the economy of the currency union is expected to shrink again in the first part of 2013, although it may begin growing again towards the end of the year.

The economic equation is painfully simple. Europe has more debt than it can sustainably service and many of its companies and countries are uncompetitive on international markets, leaving them unable to generate the revenue and economic growth necessary for it to effectively deal with its financial crisis.

The solution is for those countries affected to rein in their spending and reduce debt, while investing what they can in the infrastructure and skills that can help them compete against emerging economies — such as India and China, which have lower labour costs, among other advantages. Germany is an example of a European country that has managed to remain internationally competitive and keep its finances in order, while maintaining a sustainable social security system.

This is some of the logic behind the austerity packages that many countries have been forced to adopt. Reduced spending on too generous social benefits — which are part of the reason why some European countries ran up unmanageable debts — means more money is freed to pay-off loans and for productive investment. Unfortunately, the immediate impact of spending cuts and tax hikes is sharp economic pain.

Those in Europe who are protesting against the implementation of austerity packages, like the Greek workers who went on a general strike last week, are not facing reality and also failing to put any coherent alternative solution on the table. Refusing to give up unaffordable benefits and conditions of employment, when countries are clearly bankrupt, is not reasonable. Running up more debt will simply condemn future generations to paying off an ever-increasing financial burden. Their pain is real, but unless Greek workers and others of their ilk become a constructive part of efforts to resolve the European crisis, its economic and financial turmoil will continue.