http://www.voxeu.org/article/panic-driv ... plications
Some will say that this is the price that has to be paid for restoring budgetary orthodoxy. But is this so? Figure 5 may lead us to doubt this. It shows the austerity measures and the subsequent change in the debt-to-GDP ratios. It is striking to find a strong positive correlation. The more intense the austerity, the larger is the subsequent increase in the debt-to-GDP ratios. This is not really surprising, as we have learned from the previous figure, that those countries that applied the strongest austerity also saw their GDP (the denominator in the debt ratio) decline most forcefully. Thus, it can be concluded that the sharp austerity measures that were imposed by market and policymakers’ panic not only produced deep recessions in the countries that were exposed to the medicine, but also that up to now this medicine did not work. In fact it led to even higher debt-to-GDP ratios, and undermined the capacity of these countries to continue to service the debt. Thus the liquidity crisis that started all this, risks degenerating into a solvency crisis.
The intense austerity programs that have been dictated by financial markets create new risks for the Eurozone. While the ECB 2012 decision to be a lender of last resort in the government bond markets eliminated the existential fears about the future of the Eurozone, the new risks for the future of the Eurozone now have shifted into the social and political sphere. As it becomes obvious that the austerity programs produce unnecessary sufferings especially for the millions of people who have been thrown into unemployment and poverty, resistance against these programs is likely to increase. A resistance that may lead millions of people to wish to be liberated from what they perceive to be shackles imposed by the euro.
