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Archive for April, 2012|Monthly archive page

How short is the “short-term”?

In News on April 26, 2012 at 3:34 pm

Today European Central Bank (ECB) chief Mario Draghi speaking at a hearing in the European Parliament urged the Eurozone to continue supporting austerity and “fiscal adjustment”. His comments come after the first round of French presidential elections, where Socialist leader Francois Hollande came first and ahead of the second round of the French elections and the Greek parliamentary elections on 6 May .

One of the arguments Draghi used – and supporters of austerity measures generally reproduce – is that the recession and high unemployment levels that Greece, Portugal, Spain, and Ireland to name a few are experiencing, are the “necessary steps” on the way to growth. More importantly, this “necessary pain”, the adverse, contractionary effects, which are only to be felt in the short/ medium term.

Let’s clarify a few things about the short-term: In economics and finance, the short-term is defined as a short period of time, usually 12 months. In fact, in some fast-moving business sectors, the short-term is 6 months, but let’s be generous and round it up to 12 months.

Now let’s review some data. Greece has been in a recession since 2008 [A recession is defined as 6 months of negative growth rate. Negative growth is when the country produces less than the year/ month before. A good, healthy growth rate is usually considered to be between 3-6%]. Greece’s recession is expected to become worse in 2012. Greece’s recorded unemployment is 22%.

Ireland has been in a recession since 2008. It moved to a growth rate of 0.7% in 2011 and is to grow by 0.5% in 2012.  Unemployment is at 15%.

Portugal had  zero growth in 2008, recession in 2009, and really low growth in 2010, before moving back into recession in 2011. The recession is expected to become worse in 2012. Unemployment levels are at 15%.

Spain had a marginal growth rate in 2008, before plunging into recession in 2009 and 2010. It rebounded slightly in 2011 and is moving back into a recession for 2012. Unemployment is 25%.

These are all countries that are implementing austerity measures either because they are forced to through their Memorandum of Agreement with the IMF or through political pressures EU or nationally driven.

Draghi’s and European leaders’ remarks about the short-term are not only unfounded economically but also socially provocative.

People don’t wait for the long-term to live, gentlemen. People actually try to “live” in your “short-term”. They lose their jobs, they can’t pay their bills and taxes, they can’t afford to buy basic products. They fall below the poverty lines and leave their country to find work.

It is short-term that matters. Besides, as Keynes said, in the long-term we are all dead. But then again, his economics actually made sense.

1. People in crisis, Greece http://www.theatlantic.com/infocus/2012/04/portraits-of-greece-in-crisis/100285/

2. All the economic data can be found here

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