“recent research suggests that the austerity… will lead to social unrest”

17.08.2011 § Leave a comment

the relative debt load of leading developed economies… in german, sowwy

…recent research suggests that the austerity we see in places like Spain and Italy will lead to social unrest. “Austerity and Anarchy: Budget Cuts and Social Unrest in Europe, 1919-2009” is the title of the paper published by the Centre for Economic Policy Research. This paper finds that:

  • From the end of the Weimar Republic in Germany in the 1930s to anti-government demonstrations in Greece in 2010-11, austerity has tended to go hand in hand with politically motivated violence and social instability. In this paper, we assemble cross-country evidence for the period 1919 to the present, and examine the extent to which societies become unstable after budget cuts. The results show a clear positive correlation between fiscal retrenchment and instability.

Additionally, two economists have found that “higher per capita GDP growth is significantly negatively linked to the support for extreme political positions.” The German economists, Markus Brückner and Hans Peter Grüner wrote pointedly that:

  • Our results therefore make clear that countries should not expect right-wing parties to get majorities unless growth declines quite as much as in the 1920s. Nevertheless, even with a less significant fall in economic growth rates, a rise in support for extreme parties is likely to change political outcomes – for example through their impact on incumbent parties’ political platforms.

So what we should expect is a high level of political volatility and social unrest in Italy and Spain (as well as in Ireland, Greece and Portugal) and an increase in right extremism. The same is true regarding austerity and social and political outcomes in the US, by the way. If the level of social volatility accompanying this outcome is too great, the euro zone will break apart as the future right-leaning governments there will resort to economic nationalism and repudiate their debt by defaulting.

Eurobonds would certainly lower yields across the eurozone and reduce liquidity constraints that have required front-loaded deficit reduction attempts. The effect on Germany is arguable. But, at a minimum, euro bonds would minimize the potential for the extreme outcome from social unrest which I just outlined.

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