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Eurozone economic stall could bring more austerity measures

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With Europe’s economic recovery slumping, euro governments are under increasing pressure to act while facing considerable political obstacles and disgruntled constituencies ready to light the fuse on protests against renewed austerity measures.

Unfortunately, both for the politicians charged with enforcing austerity and the benefactors of heavily subsidized populations, economic growth means controlling government spending. In other words, Germany isn't likely to back bailouts and other funding assistance to countries like France and Italy if it feels those countries aren't serious about economic reform.

With developing nations quickly becoming the factories for developed nations, new jobs are often created outside of the eurozone, a phenomenon U.S. politicians also struggle with, particularly over the last 30 years.

While the leaders of some nations in the eurozone try to stave off enactment of new austerity measures, the trend is to pin their hopes on the European Central Bank and its launching of new stimulus measures that would be required if the eurozone recovery remains in a stall.

Since economic hard times hit Europe in 2009, heavily indebted eurozone nations have relied on tax increases and restraint in spending to counteract sagging economies and high unemployment.

Such programs have reduced deficits and bought time for countries in need of financial bailouts to get their financial affairs in order. However, economic growth has been fleeting and many nations in the eurozone remain dependent on bailouts from higher-performing euro nations. Germany, as Europe’s largest economy, pays the most into bailouts and assumes the most risk for bailouts.

With economic growth in Europe stalled the situation has ECB President Mario Draghi sounding the alarm. EU leaders will meet Oct. 6 to discuss growth, while the ECB will hold a policy meeting Thursday. Bank officials are expected to announce more stimulus, likely in the form of bond purchases to prop up heavily indebted governments.

Europe’s second quarter growth flatlined after four quarters of weak expansion. While unemployment in the U.S. reportedly fell to 6.2% from 10% at its 2009 peak, unemployment in Europe is at 11.5%, just under last summer’s 12%.

Draghi backed a proposal by Jean-Claude Juncker, the incoming head of the EU’s executive commission, that included 300 billion-euro ($394 billion) in funding for infrastructure that draws on existing EU funds and private investment.

However, Draghi has no authority to enforce such actions because each of the eurozone’s 18-member sovereign governments control spending bills. Many analysts cite this as the reason a common currency for European countries of varying economic interests and capabilities would not work in the first place.

Germany, the eurozones’s largest economic and political power, maintains a balanced budget and has relatively low unemployment. As Europe’s most powerful economy, Chancellor Angela Merkel and her government remain focused on austerity measures, particularly with respect to euro nations like Italy that carry large debt loads.

In countries like Spain and Greece, where enormous government debts had to be contained through austerity measures and ECB bailout loans largely backed by Germany, fiery street riots ensued, resulting in political upheaval over austerity measures. Despite such protests, the reality of European economics will largely determine whether euro nations face yet another wave of austerity.