May 8, 2012
The election of François Hollande in France and the outcome of the Greek elections are evident examples of the growing anti-austerity reaction in Europe. And France and Greece are not the only examples.
The Dutch Government had to resign recently after the populist right-wing party removed its support to a proposed austerity package, which included cuts to healthcare spending and increases in the retirement age. The Netherlands are of the few countries in Europe to maintain a AAA credit rating throughout the crisis. This is a clear sign that support for austerity is endangered even in the stronger economies. In Romania, the government led by the conservatives collapsed after only 78 days in office. It was the second Romanian government to fall over austerity measures this year. The collapse caused the Romanian currency “Leu” to fall to a record low against the euro. The newly chosen progressive government of Victor Ponta attempted to calm the markets by appointing a former Central Bank head as finance minister. The conservative Czech government survived – only by chance – a no-confidence vote driven by anti-austerity sentiment. All of a sudden, the conservative majority of governments faces pressure from voters.
Criticism of austerity policies is growing. It doesn’t matter whether austerity programmes are implemented by governments of the left or right or whether it is done willingly or under duress The crisis is not only economic and social but is becoming a real political one with growing populism and extremism. There is a danger of the dark side of Europe returning when governments do not act against it.
Last week Joseph Stiglitz stated in a conference organised by FEPS, the Initiative for Policy Dialogue (IPD) and Italianieuropei (IE) in Rome that “there are so many natural disasters in the world, like earthquakes and tsunamis, so it is a shame to add to these a man-made disaster. But that’s what Europe is doing.”
European governments need to play a more active role in tackling the crisis and wrong policies make matters worse. Another truth has to be taken seriously. No large economy – and Europe is one – has ever emerged from a crisis through austerity policies. Europe has resources, economic policy instruments and political structures to rescue the Euro and to overcome the crisis. Structural reforms and budgetary discipline are important, but it is the demand-side that is limiting the production and only supply side measures which lead to lower incomes and higher unemployment worsen the lack of aggregate demand.
The fiscal compact debate means that the debate over austerity has now come to a debate over Europe itself. François Hollande and the emerging anti-austerity coalition need support to transfer the willingness of alternative growth and investment strategies in the concrete path that satisfies creditors and puts Europe on a sustainable track to growth. It seems that even the markets have understood. The stock markets acted quite moderately the day after the election in France.
There are ways out of the crisis: Firstly, Germany has fiscal room for manoeuvre; secondly, a balanced expansion of taxes and spending stimulates the economy and can bring back increase in GDP and employment and thirdly and most important, the EU as a whole is not in a very bad fiscal position. The debt-GDP ratio is better than in the US. But here again we are in the middle of the question of whether we need more or less Europe. Today in Europe each member state is responsible for its own budget. This is much more difficult to handle than in the US. Therefore, progressive economists are completely right in saying: “The whole is more than the sum of the parts”.
Even if Europe cannot develop rapidly towards a real federal system, it can use already existing possibilities much better and enlarge them, such as the European Investment Bank or the European Solidarity Fund for Stabilisation as well as Eurobonds in the form of “project bonds”.
As long as the focus on austerity remains and only lip-service is paid to growth strategies, the crisis in Europe will deepen with totally unacceptable unemployment rates of 25% and even higher for the youth!
Delaying growth will be too costly for Europe and we have faced in the last century the disastrous consequences of extremism: Please, never again!