Spain has joined seven other euro-zone nations in recession, according to data released Monday, providing new evidence that austerity policies are failing to spark confidence in the region's economies ahead of a week of expected anti-austerity protests and a string of important national elections.
A growing number of politicians, led by François Hollande, the Socialist candidate in the French presidential ballot, and by Italian Prime Minister Mario Monti, have called for a shift in the focus of policies toward growth and away from austerity. Their calls have been reinforced by the weakness of many euro-zone economies, which some economists argue undermines the contention that cutting budgets pays dividends in increased economic confidence.
Some economists argue that the austerity strategy is backfiring in countries where demand is already anemic and interest rates low.
Sony Kapoor, managing director of Re-Define, an economic and financial think tank, says low economic confidence and weak banks mean public-spending cuts aren't offset by higher spending by consumers and businesses. Instead, the cuts trigger a contraction in economic activity, increasing the weight of debt, and putting confidence and the banking system under further pressure. "Once this mechanism gets under way, as in Spain, a 1% cut in public spending can lead to a 2%-3% deterioration in economic activity," he says.