Yet another austerity success story: Italy
by digby
Or it will be if they just agree to throw more human sacrifices on the alter:
The economy is once again in steep recession, forecast by economists to contract by around 2.5 percent this year. The OECD says its growth potential is now a paltry 0.3 percent.
The government aims to cut the debt from 123.4 percent of GDP this year to 114.4 percent in 2015. It says it could fall to 100 percent of output in 2019 and 60 percent in 2025.
However, this depends on borrowing costs stabilizing at pre-crisis levels, tough austerity at least until 2015 and, at the same time, a return to stable and steady growth.
The combination of all three looks like wishful thinking. The economy is already shrinking far more than the government forecast, deficit reduction is off target and belt tightening will continue to weigh on falling domestic demand.
Societe Generale projects that under the Italian growth profile it expects -- weaker than the government's -- debt will still be above 120 percent of GDP in 2020.
But never fear, austerity can never fail, it can only be failed:
When Monti replaced scandal-plagued Silvio Berlusconi last November, he rushed through 20 billion euros of deficit cuts to placate markets, including a tough pension reform that raised the retirement age.
Monti was forced to start with deficit cuts to try to meet Berlusconi's pledge to balance the budget by 2013, a target that has now slipped. Yet Italy's real problem was never the deficit, which was already among the lowest in the EU, it was growth...
Moreover, three quarters of Monti's belt tightening was made up of tax hikes -- the opposite approach to that recommended by the European Commission, which prefers spending cuts -- crushing already weak domestic demand and deepening the recession.
Of course. And it's not only the lack of adequate harsh and painful cuts that have caused this failure of austerity, it's the fact that the regulation cuts are being implemented too slowly. Nobody has any certainty so it's not working, dontcha know.
Apparently, the basic Keynesian concept that the government must boost demand, whether through tax cuts, increased government spending or (in cases like this) both, is still off the table. Italy is in a steep recession. And they are blaming it on the lack of spending cuts. Raising the retirement age and "reforming" the labor laws didn't hurt quite enough, apparently.
There's a lesson in this for America. I doubt anyone in Washington will take it.
*I should point out, obviously, that Italy had a different set of problems than the US, including high borrowing costs. But the fundamental lessons remain the same. If the problem is low demand and growth, cutting spending and raising taxes will make it worse. The insist on bleeding the hemorrhaging patient.
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