Case Study: GDP, Debt & Europe (Part 2)

In the previous article, we have understood the causes of the European crisis and how using GDP as a barometer was a major factor in leading up to it. In this article, we will concern ourselves with the consequences of the European crisis and how it is going to affect the economic activity in Europe in the future. We will also try to trace the behavior of GDP during the aftermath of this crisis.

Consequences:

✓Forced Austerity:The European crisis started with an abrupt awakening that European governments had been on a massive spending spree in the past. It brought about a realization that this perpetual expenditure growth cannot continue forever. Foreign lenders and international institutions like IMF got involved in the process. These institutions have agreed to bailout the economies only if they enforce austerity measures i.e. expenditure reduction. These bailouts will not solve the entire issue for these economies but will buy them time to fix the underlying issues.

It needs to be reminded at this juncture that GDP defines expenditure as production. Therefore any attempt at reducing expenditure, even wasteful expenditure is depicted as GDP reduction. The forced austerity measures are therefore causing unprecedented drops in GDP across all major European nations. Also, since GDP reduction is defined as recession, the European economies are considered to be in recession right now.

Now, let’s for a moment, consider what is really happening. The governments have first gone on a massive spending spree in the name of increasing the GDP. A lot of the expenditure that they incurred was wasteful. The GDP rewarded them for being wasteful until the entire system blew up! Now, when the countries are acting rational and cutting wasteful expenditure the GDP system penalizes them. The system is working upside down. It is encouraging wrong measures and discouraging the right ones!

✓Massive Unemployment: Another consequence of the European debacle has been the massive unemployment rates in European countries. Many of these countries are rumored to have unemployment rates as high as 25%. The balance 75% includes part time employees and underemployed people. Thus the employment situation is pretty bad in these countries. Once again, when jobs which are not required were being created and big salaries were being doled out by governments using taxpayer’s money to hire unproductive employees, the GDP system rewarded these actions. Now, when the reality has sunk in and these economies are trying to correct their past actions, the system discourages this.

It must be noted that the people who worked as employees are actually the victims of the system. Sure they were given fat salaries with not much work to do. However, who would say no to such a job? The onus lies with the government and the economists who were using such a faulty metric to measure economic activity that it did not warn them about the dangers awaiting them until it was too late!

✓Forced Privatization:Another big consequence of the GDP system has been the forced privatization of many essential services like water, electricity etc. These services should ideally be provided at low cost in any country. However, since the Greek government owed so much money to foreigners, in many cases they had to give away these public services to foreign corporations who in most countries around the world are known for profit maximization.Following the GDP system has thus negatively impacted the quality of life of the average European citizen. They will now find it more expensive to maintain a basic standard of living because their governments had successfully chased the dream of raising their GDP’s in the past.

✓Law and Order Breakdown: Lastly, these countries are also facing a law and order breakdown situation. Rioting and protests against the government have become pretty common. Also, since a large amount of people are unemployed, criminal activity has also shown an alarming rise. Once again the standard of living of the common people has been negatively impacted by the pursuit of the GDP dream

From the above examples, one can clearly derive the fact that GDP is not a reliable metric for the economy. Also since the GDP number has such massive implications, the Nobel prize winning authors have named their book “Mis-measuring our lives” That is how important and how grave the GDP problem really is.

Lastly, it may appear that the IMF and the Euro zone have the problem in control. In reality, they do not. It might surprise many readers that the problem which was caused by massive debt in the first place is being solved by even more debt! Countries all over Europe are borrowing money to pay off the interest due on their previous loans!

The European Financial Stability Fund (EFSF) is enabling these countries to borrow more while the common people and taxpayers are bleeding. It will be interesting to see where this crisis finally ends. However, at the present moment, the European crisis is far from over.


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