The main leaders of the EU and the eurozone, Germany’s chancellor Angela Merkel and French President Nicholas Sarkozy, introduced the New Year to their European colleagues and to investors with an ice-cold shower. Their forecast of what lies ahead in the financial and economic spheres could not have been bleaker. They may have had more than one reason for doing so.

The fierce austerity measures introduced by a number of countries have increased discontent without visible positive results- Lino Spiteri

One is factual – recession is once again gnawing at economic performance and growth. That is worst single piece of news topping a black list. Economic growth is essential if the eurozone and the rest of the EU are to escape from their socio-economic woes. Without economic growth there will be no chance whatsoever of escaping from the pincer movement of loss of output and jobs, and inadequate public revenues to help deficit countries reduce their fiscal imbalances and rein in public debt, initially by capping the cost of servicing it.

While the main attention in recent months has been on structural budget deficits, massive public debt close to anaemic gross domestic products and pressure on financial institutions holding sovereign debt in their investment portfolios, the social cost has been expressed in high and rising unemployment.

Even in countries which had emerged from the 2008/9 recession, such as Germany, resumed economic growth had not been translated into substantial net new jobs creation. That recovery, therefore, did not ease socio-economic pressures, particularly among the young. In countries like Spain such pressure increased.

It is also very evident in the United Kingdom, although that country is outside the eurozone and continues to sport its own currency and, thereby, is free to adjust its monetary policy as deemed to be required by the monetary authorities.

This situation and the failure to escape from economic contraction have increased the disappointment and anger of the unemployed, triggering protests by the disenchanted. “Occupy” movements have become commonplace. They do not seem about to end. Not even freezing winter cold has defeated the protesters.

Meanwhile, the fierce austerity measures introduced by a number of countries, including the bigger European ones like France, the UK and Italy, have increased discontent without visible positive results. As expected austerity measures are bringing about further contraction in demand and output. This could give rise to a negative illusion – deficits and public debts, even if they stay constant, will rise relative to shrinking GDP. As it is, stable fiscal deficits and public debt are no more than pious hopes.

Other indicators tell the worrying story that savage austerity measures are not working. Their intention, argued their perpetrators, a major example being the UK Chancellor of the Exchequer, was to encourage the private sector to take up the slack created by the measures, which included shedding as much public sector as possible.

The Chancellor and other economists seem to have forgotten the simple economic principle that it takes expectations of rising effective aggregate demand to pursued private supplier to invest in increased production. Instead, austerity measures serve to slash demand.

By the time a turnaround arrives, if it ever does, the social and economic costs of higher unemployment and permanently lost output will have taken a harsh toll. Nor is there any sign that measures to massage the financial markets, in particular to get banks to lend to each other again, are working. Banks rushed to grab the easy credit offered by the European Central Bank under its new leadership, only to hoard their increased liquidity.

Things have reached such a pass where banks are downgrading each other. For instance, just before Christmas Bank Sarasin (a leading Swiss private bank) has removed UBS and Credit Suisse from its investment portfolio because “they have been underperforming when compared to the international average”.

Merkel and Sarkozy may have had another reason for greeting 2012 in terms which might easily reduce confidence, rather than giving it a boost. They may be warning the rest of the eurozone, and beyond it as well, to pull up their socks much more than they have done so far. In other words, to make sure that their austerity measures are fierce enough to work. The relatively strong leaning heavily on the absolutely weak.

The result might mean further pressure on aggregate demand, giving fresh speed to the vicious circle outlined above. If that happens the actual or looming recessions will be deepened, rather than countered.

Merkel, Sarkozy, Mario Draghi of the ECB and all, what Europe (and the United States too) lack more than ever before is a handful of thinkers who can get out of the coffin-box, see a fuller picture and come up with proposals that can work over a period of time, rather than false quick-fix solutions and threats.

A return to Bretton Woods, when such thinkers had the vision to enable the world economy to get out of the ravages of the Second World War, but, where are they to be found?

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