Austerity in Europe – the new ‘barbarous relic’
Almost two years on from the first Greek ‘bail-out’, market attention is now firmly fixed on Spain which looks set to miss its deficit targets. Bond yields are once again rising and further austerity measures are planned.
I don’t see how this can work. The lessons of Greece and Portugal are pretty clear – stringent austerity (not cushioned by falling central bank policy rates or a depreciating currency – both of which are ruled out by the Euro) will simply depress GDP, drive up unemployment and drive down tax revenues. Deficits are likely to get larger rather than smaller.
The ‘optimistic’ deficit hawks hope that, eventually, the periphery countries will regain competiveness but this process could take years (if it happens at all). Meanwhile domestic political systems are pushed to breaking point by government’s clinging to a ‘there is no alternative’ mantra.
You might expect me to say that – but what is really striking is that this view is becoming wide spread.
Wolfgang Manchu in the FT on fund managers:
News coverage seems to suggest that the markets are panicking about the deficits themselves. I think this is wrong. The investors I know are worried that austerity may destroy the Spanish economy, and that it will drive Spain either out of the euro or into the arms of the European Stability Mechanism.
Meanwhile, the International Monetary Fund (IMF) appeared to cast doubt on the viability of the eurozone’s austerity drive, a strategy Germany has pushed for as key to fighting the crisis.
An internal IMF staff report quoted Abebe Selassie, the fund’s mission chief, warning that a eurozone recession could have a big impact on Portugal’s recovery effort.
“In that case, we think that chasing after fixed nominal deficit targets may not be the best policy,” said Mr Selassie, according to reports on Thursday night.
Many policy makers, commentators and investors themselves are making the same case. The only people who seem to really believe that austerity is the solution to Southern Europe’s ills (which lets remind ourselves in most cases originate from a balance of payments problems rather than a public spending issues) nowadays appear to be an odd coalition of ECB and EC officials, the Bundesbank and the credit ratings agencies (on whom this post from Jonathan Portes is well worth a read).
But I’m starting to doubt that even they really believe austerity can work. I suspect that their foisting of austerity on the periphery is more a question of some misguided view of ‘moral hazard’ than anything else.
Self-defeating austerity is becoming the default even as people cease to believe can it work. It’s the Eurozone’s new orthodoxy, in a way the gold standard was in the inter-war years, what Keynes referred to as a ‘barbarous relic’.
I’m very much struck by the reported comments of Sidney Webb, a minister in the 1929-1931 Labour government, after the National Government took the UK off gold in 1931 – ‘No one ever told us we could that’.
In terms of attitudes towards fiscal policy, we seem to be back in the same place. We are told there is no alternative, in hindsight