Europe's Leaders Need To Face Facts: Austerity Isn't Working

The best definition of insanity is doing the same thing over and over again but expecting a different result.

And while it's rarely an effective strategy to lob accusations of mental instability or intellectual deficiency at those with whom you disagree, the temptation in this case is immense.

Just what on earth are Europe's leaders doing?

A mere seven weeks after UK Prime Minister David Cameron was accused of "isolation" over his refusal to ink the region's fiscal compact (otherwise known as the longest suicide note in European history), the evidence of the impossibility of growing economies and creating jobs through the handcuffs of deficit reduction and permanent, legally obligated austerity seems to mount with each passing day.

TEST CASE

Exhibit A in the case of Common Sense versus the European Union was offered again today by the Bank of Greece. With the sums only just finished on its March estimate for economic growth and budget deficit targets, the central bank said Tuesday it expects GDP to shrink 5 percent this year and for the government to trim the reported budget deficit to 7.5 percent of that. That takes Greece's crippling recession into its fifth consecutive year.

Greeks will head to the polls on 6 May - the same day as the second round of France's presidential elections - to elect a government that will need to find a way to slash a further €11 billion from an already anaemic public sector and raise the not insignificant sum of €3 billion in taxes, according to IMF figures.

Good luck with that.

WIGGLE ROOM

Meanwhile, the heretofore poster child of European fiscal discipline, the rudderless Dutch, are asking for a teeny tiny bit of extra wiggle room in their efforts to meet their own bombastically lobbied targets.

Opposition leader Diederik Samson says "exceptional circumstances" allow for a budget plan that brings the shortfall to 3.6 percent of GDP instead of the mandated 3 percent. Geert Wilders, whose Freedom Party trigged the government's collapse this weekend, said, in effect, "what the hey, why not 4 percent?" in response to Samson's thoughts on breaking his own deficit reduction rules because of the "exceptional circumstance" of not being able to meet them in the first place.

I wonder what the Dutch word is for "irony".

And let's not forget Spain, where Prime Minister Mariano Rajoy all but abandoned any pretence of meeting the obligations he signed up for only last month.

Within minutes, it seemed, he warned his painful €27 billion in spending cuts won't be enough to get his country's deficit scorecard up to European snuff. No surprise, given an unemployment rate north of 20 percent, an economy officially back in recession and a property market bust that might take a generation to repair.

PYRRHIC VICTORY

Even when governments obey the demanded austerity, as is the case in Ireland, the reward for staying on track is pyrrhic at best. Strip away the €5.8 billion needed to protect its banking system from collapse and you're still looking at an Irish budget shortfall that's 9.1 percent of GDP and the largest in Europe.

Meanwhile, your economy may grow, at best, by 0.5 percent this year. That won't be enough to find jobs for the 440,000 people currently claiming benefits or the 14.3 percent of the workforce currency seeking work. Nor will it entice the new generation of Irish diaspora to return home. No wonder polls suggest a rejection of the fiscal compact is not beyond question when the Irish vote in a 31 May referendum.

The facts are these: Economies all around the region are slowing. And, apart from Germany, unemployment is rising, confidence is sinking and the bond market vigilantes are once again licking their lips after gorging on short-selling profits in Greece, Ireland and Portugal.

ODD SILENCE

At the same time, the principal architects of Europe's new-found fiscal prudence are struggling to justify their positions. Nicolas Sarkzoy is fighting for his political life in France (where Socialist leader Francois Hollande has promised to renegotiate the fiscal pact if elected) while Anglea Merkel has gone oddly quiet in the face of a growing chorus of criticism in and outside of Germany.

You can't ask an athlete to add strength and run faster while simultaneously bullying him into signing a promise to limit his caloric intake.

It just doesn't work.

And you can't reasonably ask governments to commit to deficit limits while they're obliged to meet the not unreasonable demands of their constituents: Grow the economy, create jobs and keep a lid on inflation.

It's clearly *not* working. Investors know it. The unemployed know it. The squeezed middle class knows it.

The only question now is this: Will Europe's leaders admit it?