Germany’s Economic Research Institute says that austerity has amplified the effects of the recession, has stimulated unemployment and has discouraged investment
The institute’s study concludes that austerity cuts in Portugal, Spain and Italy "partly offset" the positive effects of structural reforms and drove these economies into a double recession.
The Economic Research Institute believes that "a more balanced policy mix" would have been more beneficial to countries left reeling by the debt crisis.
"The austerity measures and tax hikes implemented since 2010 have not reduced sovereign debt in Portugal, Spain and Italy as planned," the study said.
On the contrary, these measures are "among the forces that brought these three economies back into recession," a phenomenon also known as a secondary recession.
The German economists stress that the failure of policies pursued in many European countries was not so much due to the lack of reformist will by the governments, but to the detrimental effect of dramatic cuts and steep tax hikes.
The study explains that tightening financial conditions forced families to devote a greater proportion of resources to paying mortgages.
The drop in disposable income hampered household consumption and then the government "raised taxes and cut spending, which only amplified the depressing effect on the economy," says Mathias Klein, one of the authors of the study.
"The sharp drop in private consumption has reduced the Gross Domestic Product (GDP) and raised unemployment," said Klein.
Austerity widened the effects of the recession, reducing long-term productive potential, as it stimulated high unemployment due to the crisis (especially long-term unemployment), and discouraged investment in research and development, the report said.
With 20-20 hindsight, co-author of the study Philipp Engler added that it would have been had been preferable to have sought a "very slow" recovery, arguing that "fiscal consolidation has no chance of success in such an environment."
A more balanced mix of measures, with moderate budgetary adjustments, structural reforms and a budgetary focus on investment would have had a more positive effect on the economy.
So, the policies that Pedro Passos Coelho’s coalition government was pushed into, as a result of the country receiving a bailout, were economically flawed – as his opposition stated all along – and the softer economic line taken by the current socialist administration is more in tune with polices that the German Institute said would have worked far better.
