As the world watches Europe crumble, a general consensus has formed that austerity measures have failed: Government cutbacks have led to higher unemployment and lower tax revenues, tripping many of the already struggling sovereigns into recession.
The worst off of the European economies is not surprisingly Greece, which agreed drastic austerity measures and is now undergoing its worst recession since World War II. Youth unemployment is over 50% and some citizens have even resorted to suicide. The terms set out in its bailout package require Greece to cut its debt-to-GDP to 120 percent by 2020; in 2011, the country's debt-to-GDP was more than 160 percent.
Some of this country's most notable economists, including New York Times columnist Paul Krugman and former Labor Secretary Robert Reich, have cautioned the U.S. must learn from Europe's mistakes and not go down the same path toward austerity. (See: Krugman: How To Fix The Economy? Do The Exact Opposite Of What We're Doing)
But Michael Pento, president of Pento Portfolio Strategies, says those famed pro-stimulus luminaries have it all wrong, and likens their economic remedies to delaying a very painful hangover by continuing to drink.
In a recent commentary Pento writes:
....Mr. Reich and those like him who vilify austerity measures are ignoring the reality that investors in periphery European sovereign debt had already declared those markets to be insolvent. Sharply rising bond yields in southern Europe and Ireland were a clear signal that their debt to GDP ratios had eclipsed the level in which investors believed the tax base could support the debt. Once sovereign debt has risen to a level that it cannot be paid back, by definition, the country must default through hyperinflation or restructuring.
However, in the unlikely scenario that the bond market actually has it wrong, a dramatic reduction in government spending gives sovereigns their only fighting chance before admitting defeat and pursuing one of the two default strategies.
If these governments can quickly balance their budgets and lower the level of nominal debt outstanding; it gives them a chance to restore investors' confidence in the bond market, bolsters confidence in holding the Euro and offers the hope that the private sector can rapidly supplant the erstwhile reliance on public sector spending....
The sad truth is that austerity is coming to Europe regardless of whether it is voluntary, or because the international bond market forces it upon them....
Pento joins The Daily Ticker's Aaron Task in the accompanying video to discuss why he believes austerity is Europe's last and only hope to stave off sovereign debt defaults.
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