This mornings news is anything but positive. U.S. growth is still positive but it would have been 0.6 % greater had government cuts not subtracted from the total, leaving U.S. growth in the first quarter still positive but only modestly so. Once again we have evidence that austerity does not promote growth but has exactly the opposite impact when you are trying to recover from an economic slump. Just as I predicted last January and in fact have been explaining ever since 1983. See my post of January 30, 2012, Austerity and Aggregate Demand, Some harsh facts. (this blog) More tragic evidence of how much damage austerity and belt tightening can do comes from the unemployment numbers in Spain where the rate has now reached 24.4 %, truly a depression level, which threatens to become chronic in Spain closely followed by the rate in Greece which is not far behind. 5.6 million Spanish workers are now unemployed. 1.08 million Greeks are similarly unemployed and the Greek rate of unemployment is 21.8 %. The obstinate refusal of the leading figures at the ECB and some of the European leadership to understand how inappropriate austerity is is extraordinary. Cutting government expenditures in a misguided attempt to balance the books before you are close to low unemployment does not cause private investment to increase. It has just the opposite effect. Bond market speculators are not job creating entrepreneurs.
Furthermore, cutting back does not cause the real wage to fall to the mythical classical labour market clearing equilibrium level for the simple reason that the real wage is the outcome of the nominal wage and the rate of inflation which aside from oil, a cartelized resource, is falling not rising because of the depression.In the meantime the nominal cuts in wages and rising unemployment causes aggregate demand to shrink despite the falling prices as workers fearing for their jobs or actually losing them to cuts spend less. So the policy is doomed to fail and at the same time cause absolutely unnecessary hardship for millions of people
A much better more effective alternative to deal with rising debt levels is to create a Eurobond backed by as many countries as possible and making it accessible to member countries in proportion to their relative GDP and rate of unemployment, authorizing the ECB to trade in them and encourage fiscal stimulus that is specifically targeted at job creation.With the likely election of M.Hollande in France there ought to be an opportunity to place these items on the European agenda in the next few months. Once Europe is growing robustly again and the debt to GDP ratio is stabilizing then one can address the concerns of fiscal conservatives.(For an interesting technical paper which demonstrates the perversity of a policy of austerity in a currency union in countries with high unemployment and elevated private debt see Reiner Maurer, Why austerity can be self -defeating for member states of a currency union. Pforzheim University, Germany http.//ssrn.com/abstract=1998084) Maurer points out what I and some other Keynesian and post Keynesian economists have argued for many years about the perversity of deficit hysteria. One needs economic growth and interest rates below the rate of growth of the GDP to reduce the ratio of debt to GDP over time. In fact the late Robert Eisner in his excellent and under appreciated work How Real is the Federal Deficit demonstrated how running a high employment deficit-high unemployment deficits are often actually high employment surpluses- was stimulative of positive GDP growth and the stock market over a one to two year lag.)