The dramatic suicide of a Greek pensioner, who shot himself in the central square in Athens during rush hour earlier this month, highlights the despair and humiliation the country's near bankruptcy and enforced austerity have brought to millions of Greeks.
It also raises the question whether, by forcing shaky eurozone economies to make deep cuts in their spending, European leaders are not actually making the problems worse. After five years of recession, Greece is now so poor that it cannot even raise the tax revenues needed to keep pace with its repayment obligations. Most people think that, despite the massive bail-outs from fellow eurozone members, the country will be forced sooner or later to quit the single currency.
It is not only in Greece that the policy of austerity is being questioned. In Spain, where the economy is threatened by very high unemployment, deeply indebted banks and a flight of international confidence, Mariano Rajoy, the newly-elected conservative Prime Minister, has just unveiled the harshest budget measures since before the country's return to democracy in 1978. The result has been widespread anger, criticism and strikes, with almost every sector rejecting the cuts proposed. A national strike brought the country to a standstill on March 29. It came amid growing concern about Spain in Brussels and the financial markets, which have put pressure on bond yields in recent weeks. And although Spain has not had trouble raising money on international markets, with an economy that is twice the size of Greece, Portugal and Ireland put together, any problems in Spain would have far-reaching consequences throughout the euro zone.
The European Union has set Spain a target of cutting its deficit from 8.5% of GDP to 5.3% this year, a net cut of some 34bn. As the country falls back into a double-dip recession, however, economists say austerity measures will sharpen the fall. The government already predicts a 1.7% fall in GDP this year, with unemployment rising to 24 %.
Italy, too, has seen strong opposition to the austerity measures announced by the new technocrat government of Mario Monti. There have been strikes, protests and threats from the ousted Silvio Berlusconi and his allies to bring down the government. So far, Monti has managed to persuade Italians that cuts are needed to regain economic credibility. But the full impact of the budget squeeze has not yet hit most Italians.
Britain was one of the first West European countries to propose widespread cuts in the wake of the money pumped into the ailing economy after the 2008 global economic crash. The Conservative-Liberal coalition gave a warning on taking office in 2010 that unless government spending was sharply reduced, Britains's economy – still rated AAA by international rating agencies – would be downgraded, making borrowing much more expensive and adding hugely to Britain's debts. Over the past two years, therefore, a series of cuts have forced the sacking of many civil servants, slashed defence spending, and, most controversially, reduced social security and welfare spending.
The measures have rapidly increased unemployment, provoking widespread anger and trade union opposition. They have been welcomed by the markets, and Britain has maintained its top credit rating. But some economists maintain that austerity is exactly the wrong medicine in times of economic downturn. They point to the lessons of the 1930s, when big cuts in spending produced mass unemployment, deflation and a downward economic spiral. Instead, the economists say, Western Europe should adopt the principles put forward by John Maynard Keynes and adopted by Roosevelt's "New Deal" policy in America – spend your way out of trouble.
There are signs now that many European leaders are unsure which approach to adopt. Nowhere is this clearer than in France, where the economy has become the dominant issue in the weeks leading up to the presidential election. Until recently, neither President Sarkozy nor his Socialist challenger, Francois Hollande, said a word about the need to cut spending. The French electorate appears to think France, uniquely, is isolated from the difficult global economy, and it came as a shock when the international rating agencies downgraded France's previous top rating.
Indeed, Hollande called for a massive new round of government spending, which he said would be funded by higher taxes on the rich, levying a rate of 75 per cent for the top earners, while Jean-Luc Melenchon, the challenger on the far left, said he would confiscare all earnings above 360,000 euros a year. Hollande promised to hire 60,000 more teachers, to reduce retirement age from 62 to 60, to spend some two billion euros on creating 150,000 jobs for young people and to pay billions more for aid to industry, grants and tax reform. He has not said where the money will come from.
Sarkozy knows, however, that France cannot afford such generosity if it is to remain competitive. Labour costs have risen from being 8% lower than Germany's to 10% higher. France needs to raise 80 billion euros this year to finance its debt and another 240 billion euros in 2014. Sarkozy has not spelt out the austerity measures that France would need to take to bring down its debt, however. French voters do not want to hear any talk of cuts. Instead, the President is focusing on other domestic issues: immigration, law and order and the threat from Islamist extremists.
Those countries that have already taken the toughest austerity measures in Europe – Iceland and Ireland – have begun to see a modest recovery. Indeed, Iceland, which went spectacularly bankrupt and defaulted on its debts, last year recorded a healthy growth of 3.1 per cent – though it is still far below the very high living standards it enjoy before 2008. Ireland, too, is seeing renewed growth after a massive fall in its GDP. Both countries are in many way exceptions: very small populations, a coherent and old political culture and populations that throughout history have been ready to accept hardship.
The bigger countries find austerity politically much more difficult to impose. Even Germany, the biggest economy in Europe and the main force demanding spending cuts in Greece and other countries offered EU fiscal support, is now wondering why their policies do not seem to be working in Greece. Germany, which has long demanded greater budget cuts in Greece, has earned huge unpopularity in Athens. Now Angela Merkel faces an impossible choice: push for a fiscal union in the eurozone that would lock in for ever German transfer payments to Greece and possibly other poorer countries (a policy deeply resented by German voters); or head for a euro exit, with all that it entails for German industry.
The immediate crisis in the eurozone has abated, following the last bail-out of Greece. And European countries outside the euro but dependent on its markets, such as Britain and Denmark, are also breathing a sigh of relief. But if the Socialists win the French elections, instability might again rock the whole zone, as markets would take fright at Hollande's reckless promises and France would find itself under huge attack by speculators. For the moment there is a lull. But few expect a smooth ride in the eurozone for the rest of the year.