“austerity policies are failing to spark confidence”: Spain in Recession, Braces for Protests – WSJ.com

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.

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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.

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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.

via Spain in Recession, Braces for Protests – WSJ.com.

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