Savings are ineffective, except when they yield positive results

The global recession has led to a debt crisis in countries, international creditors have imposed severe austerity measures on countries threatened with bankruptcy or that have already declared bankruptcy, many tears have been shed in financial markets, and even more omniscient individuals and economists have emerged with claims that austerity measures prolong agony, pointing fingers at creditors, especially Germany. The Greek example has marked, once again, this year coming to an end, and for many, austerity is an ineffective economic measure, except when such moves do indeed yield positive results, emphasize Saxo Bank.

– If we take Greece as an example, then all arguments against austerity are completely valid, at least on the surface. After seven years of recession, the unemployment rate is still in a deep pit, at an incredible 24.6 percent, which is negligibly less than the highest reached 27.9 percent unemployment. However, we must not forget that austerity has brought improvement to some countries, such as Portugal and Spain, although none stand out like Ireland – reminds Mads Koefoed, head of macro strategy at Saxo Bank, that the banking system crisis in Ireland seriously affected the economy, with a GDP drop of about 11 percent over two years while unemployment jumped from less than five to nearly 15 percent.

Irish banks heavily indebted abroad during the so-called property bubble, but then the Credit Institutions Act was introduced in 2008, followed by the recapitalization of Bank of Ireland and Allied Irish Bank, culminating in November 2010 with a bankruptcy worth 85 billion euros. Harsh austerity measures have brought much dissatisfaction among ‘omniscients’, politicians, and the general public, but the results achieved are worth serious study.

Perhaps there is a bit more substance in the economy and recovery than the simple stance of austerity vs. non-austerity, and other factors should be considered, such as the willingness of authorities in the bankrupt state to detect real problems and implement reforms to solve them, Koefoed points out, explaining that the moves by the authorities in Iceland have certainly paid off, with GDP now 2.9 percent higher than at its peak in 2007, with a drop of 12 percent in that interim period to date, while the unemployment rate is currently at 2.6 percent, compared to one percent in 2007 and nine percent in 2010. However, this does not mean that this is the only right path, and Ireland is proof of that. GDP in Ireland has been growing from 2010 to today and is now 7.3 percent above the previous peak level, or even 20.8 percent higher than at the end of 2009. And all this despite the fact that the state has reduced spending, even by eight percent compared to the period when spending was at its highest.

– Structural reforms in Ireland include restructuring banks with reduced balance sheets, although this is still far from a completed process, consolidation of public finances, and strong encouragement of competitiveness. Namely, exports grew strongly in the years before the collapse, but so did wages, even faster, which destroyed competitiveness. The situation has now turned around, and exports are once again growing strongly – states Koefoed.

The budget deficit has decreased, according to forecasts, to less than three percent for 2015, down from over ten percent during the years between 2009 and 2011, so such consolidation of public finances certainly creates pressure on domestic demand. However, indicators also suggest that consumer confidence has strongly recovered along with the economy, and will even rise to levels above those recorded in the years before the crisis and collapse. Companies are evidently also satisfied, with PMI indices for the manufacturing and service sectors significantly above 50 percent. The public debt to GDP ratio, although still high, has decreased from 120 to 107 percent, and the surplus on the current account is around five percent of GDP, compared to a similar deficit in 2008. It is projected that Irish GDP will grow in the coming years, which will mean a smaller deficit, fewer unemployed, and higher economic activity, Saxo Bank reports.

When living above one’s means for over a decade, it is reasonable to criticize state management and expect improvements in the structural settings of the economy. Some countries, such as Ireland and those in the Baltic, have understood this, as have Portugal and Spain to a certain extent, regardless of how differently they reacted to accepting this problem. And some have not, and the introduction or non-introduction of austerity measures will not change that, concludes macro strategist at Saxo Bank, Mads Koefoed.