Europe has tried fiscal austerity in the face of its debt difficulties. That might have more obviously been an approach consistent with dealing with an inflation problem (of the “it's too high” variety). But it doesn't appear as consistent with dealing with an unemployment problem at all. And so maybe it is little wonder that calls for an alternative approach are on the rise, just as they were in Latin America by 1985. On Tuesday, Beppe Grillo and his anti-establishment Five Star movement gained 25% of the votes cast in the Italian General Election. On Thursday, the UK Conservatives were pushed into third place by UKIP (UK Independence Party) in the Eastleigh by-election. Even the Dutch are softening their approach to austerity: “we shouldn't only look at cost savings, but also at how we can help revive the economy and create jobs”, said the Finance Minister earlier this week. The French finance minister is reported to have reacted to the Italian election results by saying - "The message from Italy is: 'Be careful, when you are in a situation in which you ask populations to make sacrifices for long periods, at the end you risk having protests'. There needs to be another perspective - which is growth again."

Eoin Treacy's view This report develops some interesting comparisons between the political situation in Europe today and that in Latin America during the 1980s. The commitment to an austerity driven program which has characterised the response to the Eurozone's debt problems to date has been pioneered by countries where austerity has not had to be endured on this occasion. There is no guarantee that the populations of Spain, Italy, Ireland, Greece, Portugal and Cyprus are going to be willing to continue to accept terms dictated from abroad in the absence of concrete evidence that their economies are returning to a sustainable growth footing. In this regard, the trajectory of government bond spreads will remain instructive. (Also see Comment of the Day on February 26th).