One can hardly pay any attention to international news recently without hearing the baying calls of the two equally ferocious and vociferous camps: on the one hand, those who call for austerity and restructuring in order to put flagging EU economies back on the path to growth,and those who decry such measures as too harsh (at best) or ineffective (at worst), and instead fight to retain what might rationally be called the status-quo of welfare-statism and government spending to push demand up.
The EU leader most closely associated with the push for austerity measures (or, as she would undoubtedly call it, fiscal discipline) is German Chancellor Angela Merkel. Though she has been vilified by many of Southern Europe’s unemployed youth
(Czuczka & Donahue, 2013), Merkel insists that
cutting spending; in some cases, drastically; is the way for each constituent
nation to reach their target of having annual budget deficits at a level no
greater than 3% of GDP. The EU requires, as part of its ‘convergence criteria’
to be permitted to adopt the Euro currency, this 3%-or-lower ratio as well as a
sovereign debt-to-GDP ratio of no more than 60%.
Those who place an emphasis on austerity do so because they think that in order for the EU to recover, each nation’s finances must be in order. They believe that you cannot spend your way out of a recession, because attempting to do so increases inflation and also increases the total amount of debt which must eventually be repaid. Both of these effects serve to drive up borrowing costs. They also feel that these ‘austerity’ reforms were changes which would need to have happened at some time anyhow. To quote Peter Praet, the Belgian chief economist of the European Central Bank:
“It is something that was long due. Unfortunately, it comes in a very harsh way – but you must remember that even before the crisis there were concerns. At that time, decision makers thought they had ten years to prepare for an aging population. Now, with the economic slowdown because of the crisis, we have lost, in many countries, those ten years. Reforms have to be pushed faster than what was planned. It had to happen anyway, but now it has to happen faster.”
Merkel has some evidence backing her calls for austerity; after 2000, Germany focused on reducing labor costs in order to become more competitive overseas and has largely succeeded in doing so. According to an index compiled by the European Central Bank in 2012, Germany increased its foreign competitiveness by 22.5% since 1999, compared with only 1.2% for France (and 1.4 percent in Italy).
(Czuczka & Donahue, 2013)
All of that having been said, the European Commissioner for Economic and Monetary Affairs, Olli Rehn, has officially forecast that the Euro-area economy would, as a whole, shrink for the second year in a row, the first time since 1999 that such a back-to-back contraction has happened. Rehn is quoted as saying that the prospects for growth among many regions in the EU were, “very disappointing,” and that, “the ongoing rebalancing of the European economy is continuing to weigh on growth in the short term.”
(Kanter, 2013) All said, there is some variation among
the nations in the EU; France is set to just barely manage to grow 0.1%; some
nations will grow more, and some will grow less. Rehn did forecast one bit of
good news, however: he predicted that the European Union’s economies would
resume growth in 2014, with the Eurozone nations growing 1.4% (Kanter, 2013).
Paul Krugman, to the surprise of no one, is an opponent of austerity measures. Despite Olli Rehn’s (rather astute, in my opinion) observation that the EU, “won’t solve [their] growth problems by piling new debt on top of [their] old debt,” Krugman rather briefly dismisses any such fiscal belt-tightening as a ‘cockroach idea.’ French President Francois Hollande agrees in sprit with Krugman; he too opposes austerity measures, preferring instead to focus on what he calls ‘growth’ (that both sides seek growth, and only differ in the road which they think leads to it, goes unsaid). In a recent press conference, Hollande has said, “do we only have to reduce our public deficits? No… we also have to boost growth.”
(Czuczka & Donahue, 2013)
Another key factor in the austerity discussion is the unrest fermenting among the unemployed in Southern Europe. As the election in Italy- where an ex-comedian’s protest party gained 25% of the vote- shows, there are large and vocal portions of the population unwilling to accept the reductions in the welfare state that austerity measures almost universally entail.
(Neuger & O'Donnell, 2013)
Despite their differences, France and Germany, the Eurozone’s largest economies, have pledged to jointly produce a blueprint for recovery which they plan to present to the annual summit in June.
(Czuczka & Donahue, 2013)
In my opinion, neither strict and sever austerity nor expansions in government spending to promote growth are the right way to go. While there is an obvious need for governments to accept reality and realize that they cannot spend more than they take in ad infinitum, simply pulling the plug all at once may not be the best way to transition into more responsible fiscal policy. On the other hand, ratcheting up spending at a time when the levels of sovereign debt are already in a crisis seems absurd as well. It seems to me that a policy of targeted investment, rather than profligate and indiscretionary spending, is more likely to produce economic growth in the medium to long run.
Simply dumping money into the economy won’t do it, but perhaps generating an institutional framework wherein private investment is less taxed and more rewarded, and where economic infrastructures are renewed and improved, might be just the right measures to get stagnant economies in Southern Europe going. Spain, Portugal, Italy, Greece… they have the resources, and they have the labor. What is lacking is not government spending, it is genuine entrepreneurship based in a regime of stable expectations and available credit. The Euro can provide that stability and that credit, but only if each constituent nation- including those presently wracked by debt crises- upholds their agreement to maintain it.
It is clear to me that adjustments of some kind must come eventually. The longer they are put off, the farther off the path the economies get, and the more severe the adjustment must be. Doing something now, cutting some spending now, is clearly preferable to making sudden, massive changes in structure and eliminating most spending at some point in the future. Harsh though austerity measures may be, they would need to be worse if we waited longer to implement them.
The Unite States would do well to take heed with what is going on in Europe. Without any supranational body governing our finances, and without any obligations through treaty to maintain our currency or to control our deficit spending and total debt, which are, at present, at about 7.3% and 93.4% respectively, the United States is headed down the same path as nations like Spain, Italy, and France. The only thing that has saved us so far is the immensity of our economy and the vastness of our resources. Make no mistake- our present course, even after the so-called 'sequestration' and the 'cuts' that have gone on so far, is ultimately unsustainable.
The reckoning cometh soon...
Works Cited/Further Reading:
Austerity Versus Growth? (n.d.). Retrieved from Debating Europe: http://www.debatingeurope.eu/growth/austerity-versus-growth/
Czuczka, T., & Donahue, P. (2013, March 6). Merkel Looks East for Austerity Allies in Hollande Talks. Retrieved from Bloomberg: http://www.bloomberg.com/news/2013-03-05/merkel-looks-east-for-austerity-allies-in-talks-with-hollande.html
Kanter, J. (2013, February 13). EU’s Olli Rehn Forecasts Shrinkage of Euro-area Economy for 2d Year in a Row. Retrieved from The Boston Globe: http://www.bostonglobe.com/business/2013/02/23/olli-rehn-forecasts-shrinkage-euro-area-economy-for-year-row/usJn5SacMgjinmmRcbrcfO/story.html
Krugman, P. (2013, March 4). Cockroaches at the European Commission . Retrieved from The New York Times: http://krugman.blogs.nytimes.com/2013/03/04/cockroaches-at-the-european-commission/
Neuger, J., & O'Donnell, S. (2013, March 5). EU Opens Way for Easier Budgets After Austerity Backlash. Retrieved from Bloomberg: http://www.bloomberg.com/news/2013-03-04/eu-opens-way-for-easier-budgets-after-italian-austerity-backlash.html
Spiegel, P., & Carnegy, H. (2013, February 21). EU Chief Urges Shift Away From Deficits. Financial Times.