With Europe’s leading economic nations meeting at the G8 and G20, it’s not surprising that sweeping economic reform is the talk of the table. And it’s the new U.K. Prime Minister, David Cameron, who is the first one to make the deepest cuts in the federal deficit. It seems with the Greek bailout, everyone is going ‘austerity mad.’ But is this a good thing for the short to medium term? And will it work, or just create more instability?
Cameron is suggesting the largest budget cuts of any European nation, as the U.K. has the worst deficit, but even President Obama, who himself is in the midst of a massive ‘house cleaning’, is concerned that ‘cut, cut, cut’ is only half of the story – where is economic growth amongst this? And he’s not alone. As Bloomberg Business Week reports, a former Bank of England policy maker, David Blanchflower, had a cautious word on the subject of austerity, “This is going to be one of the biggest experiments, and the U.S. can sit and watch and look to see what happens to the U.K. output data, which I suspect is about to collapse.” The key, and it’s a tricky one, is for nations to somehow manage simultaneous growth, whilst cutting spending – a high wire balancing act, for sure. One economic expert can argue that there can be no growth until debts are taken care of, while another will say this is a dangerous game that saw U.S. President Roosevelt add more woe to the Great Depression by over-emphasizing spending cuts and raising taxes in the 1930’s.
Regardless, someone has to take the first step and that seems to be the U.K. The rest of the world will “sit and watch” and cautiously begin to make changes, hopefully before another Greek-style bail out is necessary.
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