Over the past several years there has been a lot of financial talk on the news that have been strong enough to move the markets. One such item that has been repeated a lot is talk about “austerity measures.” This is especially common when talking about Spain and Greece and a few other European countries. While it is clear from the context that it has something to do with government spending, and the economic situation of that particular country, what exactly are austerity measures?
When a country starts to get into economic trouble, the government generally will step in to help get things back on track. While most of the time, the remedy is fairly simple, there are times when more drastic measures need to be taken. For example, here in the US we have seen several heavy doses of stimulus money poured into the economy. While the effectiveness of these quantitative easing can be argued, the fact is, government spending usually jumpstarts the economy when people and businesses are unable to do so themselves. This is great when the government has the means to do so, but what if they are already strapped for cash?
Selling treasury bonds is a way the government raises money. But a bond is only as good as the company (or in this case government) backing it. If there are questions about the government’s ability to make good on their debt, or their solvency, there is a possibility of the bonds being downgraded. This will both cause fewer people to want to invest in that government, and it will cause the interest rates to rise (higher risk means they need to entice investors with a higher reward). In the end, it ends up costing the government even more money.
The biggest debate about austerity measures is: do they work? Many critics think more government spending is the answer, not less. We have seen the debate here in the US with the fiscal cliff, where the government is facing forced austerity measures. While nobody likes paying more and getting less, the common welfare of a country should be the main focus. Sometimes it is necessary for everyone to tighten their belts today in order to have the services tomorrow. Austerity measures, at their most basic definition, are the opposite of a stimulus package.
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