The perils of toeing the line on austerity

One by one, electorates will demand alternatives to austerity measures.

The European Union is not yet cowering with fear at the “revolt against austerity” recently thrown into relief by events in France and the Netherlands. There is still a determination in all major capitals bar one to stick to a set of policies based on the logic that the best way to beat a debt crisis is to stop adding to your debts. So, it says, cut your spending, raise your taxes and throw a protective arm around your banks, and you will eventually break through into a sunny meadow carpeted with the green shoots of economic growth.

This is now a well-worn liturgy that does not seem to be working. François Hollande’s probable election as the next president of France on Sunday (6 May) and the recent fall of the Dutch government over the contents of an austerity budget for 2013 are a woeful warning of an approaching storm for all incumbent governments pushing up taxes while carving large chunks out of spending budgets. Politicians who read the fine-print of election results will have plenty to ponder in the coming weeks. In addition to the vote in France, Greece will be electing a new parliament this Sunday and Italy votes in a round of local elections. German state elections follow a week later. On 31 May, Ireland is holding a referendum on Europe’s fiscal pact. In June, France has parliamentary elections. Then, on 12 September, the Netherlands will go to the polls.

At the moment, the reward for austerity appears to be to accelerate decreases in national income and increases in unemployment, especially among young people. Reforms are being applied across Europe but they offer little prospect of early relief. Spain, whose foreign minister says the crisis afflicting his country is “of enormous proportions”, is working on its labour market and employment laws. But opponents are beginning to persuade people that change is a malign infection imposed from Brussels and Berlin, and carrying only more economic peril.

In France, voters have rejected the insecurities of structural change and voted for a candidate whose remedies offer very uncertain pain relief. As they look around the EU, the French see only one example of a country that has reluctantly embraced change and is now more than fit for the competitive struggles posed by the global economy. If they ask themselves how Germany did it, they note that controversial structural reforms were pushed through in 2003-04 when the regional and global economies offered every prospect of growth and none of recession.

This is the moment to reflect on political leadership in the Union and to fear for the consequences of its mediocrity. Last week, our leaders seemed suddenly to wake up to the fact that the status quo of shrinking economies, rising unemployment and tottering banking systems is politically unsustainable. Mario Draghi, the president of the European Central Bank, talked about a “growth compact”; unusually, German chancellor Angela Merkel spoke about growth before talking about fiscal discipline, and Mario Monti who has been consistent on this point since he became Italian prime minister last November, spoke in praise of public investment as a driver of economic growth. And the cries of pain from Spain grew louder as a credit-rating agency hacked another couple of grades off its credit rating.

Political panic is just around the corner. Nerves will not be calmed by any informal dinner that Herman Van Rompuy, president of the European Council, chooses to lay on for a discussion on economic growth. Decisions taken in the coming weeks could be the Council’s last chance to restore some reputation for strategic economic management.

Sadly, there is nothing to point to in the Council’s past record except failure. Independent analysts have consistently pointed out since late 2010 that stringent deficit and debt reduction policies are only appropriate if economies can manage enough growth to avoid the downward spiral that itself increases deficits and debts. Europe does not have enough growth. Indeed, recessions in Spain, Italy and elsewhere are reducing demand for exports that could eventually throw even Germany into negative growth.

Moreover, the current EU austerity-only strategy is not even treating the right ailments in many countries. Excessive government deficits have not caused Spain, Italy or Ireland’s problems. Whatever doubts we may have about Hollande’s remedies for achieving economic growth, he is right to believe that without it, France might soon also be at the mercy of the markets.

José Manuel Barroso, the president of the European Commission, last week presented the Commission’s proposals for a growth and jobs budget for 2013. Reports suggest that he will follow up with a ‘Marshall plan’ for recovery. He should have done so a year ago. The draft budget proposes a 6.8% increase in spending with a modestly-increased emphasis on job-creating infrastructure investment, job-training and other supply-side policies. Almost certainly, the UK, Germany and other northern countries will angrily demand cuts because a boost to the EU budget of this size, after only a 2% rise last year, would send a clear signal that austerity was being softened.

The EU needs an alternative: either a Keynesian stimulus to demand or, at least, longer timetables for shrinking deficits. And Europe will have them, either by popular vote or policy failure – or both.

John Wyles is an independent consultant based in Brussels.

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