Rapporto CER 1/2012

Europe is in the midst of its biggest crisis. It now has a choice: It can abandon the world and go back to the village; it can opt out from the future and let the euro die. Or it can move forward and deepen integration; it can support economies in distress and provide means to accelerate growth. Where it will end up depends on how policy makers view the Euro crisis. What strategy they choose to get Europe out of the crisis follows from their understanding of its causes. From a fundamentalist point, austerity, fiscal consolidation and monetary tightening are the correct answer, and concern about the sustainability for public debt is rocking financial markets and voters’ confidence. Following this view and under markets’ pressure governments have cut down their budget deficits, but this has made the crisis worse. The Euro Area is sliding into a recession, unemployment, deficits and debt ratios are rising in most Member States. As our Report shows, solving Europe’s debt problems is not achieved by austerity alone. Fiscal consolidation is needed, but it must stand in the context of a larger growth strategy that also restores effective demand and uses Europe’s productive capacities. Cutting public expenditure and raising taxes has not reduced deficits because the collapse of income deprives governments of revenue. When the private sector fails to absorb production, the public sector must step in.