The great austerity backlash

27th April 2012

The revolt has been building since late March: "With near-empty railway stations, shut factories, mass marches and occasional outbreaks of violence during a general strike on Thursday, Spaniards showed the first signs of rebellion against the reformist, austerity-preaching conservative government they voted in four months ago."

Felix Salmon asked the question ‘how did we get here' in his Reuters blog. "In France, Socialist presidential challenger François Hollande has indicated he'll challenge austerity; the Dutch government yesterday collapsed over economic reform; and tomorrow, we may learn that the UK is back in a recession. The latest Eurostat numbers, meanwhile, are troubling. Greece, Portugal and Spain significantly reduced their respective budget deficits in the last two years, without anything resembling strong economic growth."

The revolt has been leant credibility by senior political figures across Europe: "The formula is not working, and everyone is now talking about whether austerity is the only solution," said Jordi Vaquer i Fanés, a political scientist and director of the Barcelona Center for International Affairs in Spain. "Does this mean that Merkel has lost completely? No. But it does mean that the very nature of the debate about the euro-zone crisis is changing."

Ex-Italian Prime Minister Romano Prodi said in this piece that no hope was currently being offered to the people of Europe and that austerity without sufficient emphasis on growth would lead to revolt. "In Ireland too people are suffering, like they are suffering in Italy. This is a moment in which you can impose severity, but you must give a light at the end to the tunnel," he said. "If you only promise sacrifice, sacrifice, sacrifice, in the end you will have a revolt."

He said that Germany's refusal to countenance the issuing of Eurobonds remained a problem: "They are in a trap too in some ways because if there is a break-up of the euro, do you really think that the possible German euro will go to 1.2 times the South European euro?. No, it will put the German exports completely in difficulties and they cannot afford it".

Those who voted for the German-inspired austerity package are, in some cases, no longer in government. Those who remain are seeing their core vote move to extremist parties and are having to respond accordingly. This has perhaps been most visible in France, where far-right presidential candidate Marine Le Pen received near-20% of the vote.  

Yet no one has yet managed to resolve the circular problem that these countries need growth, austerity curtails growth, but without austerity no-one will lend to them and their borrowing costs spiral to the point where their high debts are unsustainable.

On the one hand, it is clear that austerity isn't working. Salmon says: "In a back-of-the-envelope calculation of the same figures, Paul Krugman estimates that "1 euro of austerity yields only about 0.4 euros of reduced deficit." But on the other, it is far from clear that higher spending is the answer: "Why does any sane person think spending for growth will work?" Just pause for one moment. How were these massive deficits built up? Was all the spending frivolous? I don't think so.  A lot of spending was meant to target growth in certain areas.  It is just very difficult to achieve. If spending to get growth was so easy in a global economy, the U.S., the current king of spending, would have Chinese like GDP growth.  It is not that easy to spend your way to growth.  I'm sure at some level, Solyndra received money because there was a real belief somewhere that it was a good investment for growth. GM might be used as an example, but I'm not convinced that the government spending did anything more than private capital would have done in the wake of a real bankruptcy.  The excitement over "spending for growth" is almost mind-boggling, because it basically goes against a decade of history showing the inability of governments to spend and achieve real growth." 

The Eurozone appears to be moving inexorably away from austerity as a solution to its debt crisis. However, it remains unclear as to what will replace it. In the meantime stock markets are likely to remain under pressure and the Euro is likely to stay weak. Eurozone politicians will have to decide when the cost of retaining the Euro simply becomes too high. 

 

More from Mindful Money:

The truth about debt and deficits

Push for austerity brings down Dutch government

Paradigm Lost: Rethinking our global economic system

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