My tour of European austerity’s next stop is Germany. However, I have criticized austerity without putting it into context. I have simply assumed it is a bad thing, and avoided entering a discussion on what austerity is and does. This is unfair. So for the time being Germany will join European Structural Funds in the corner of neglected posts, and I’ll go over austerity.
What is austerity?
If you have time, BPR and the Watson Institute have great explanations of what austerity is. If not, it basically means a given country has “lived beyond its means” and must “tighten its belt” because “there is no alternative” other than cut-cut-cut-cut-CUTTING through the budget like Monty Python’s psychotic barber. The last metaphor, by the way, describes reality far better than the pre-packaged sound bites I quoted before.
Depending on their color, national governments feel more or less excited about the cutting business. But when pressure comes from Frankfurt and Brussels, they all implement austerity. Socialists try to do it in a nicer way, but it still gets them kicked out of office.
Why is austerity bad?
In the first place, it rests upon lazy or simply racist cultural assumptions. The underlying message is that PIIGS (or GIPSIs –there is no shortage of well-meaning acronyms) were too busy napping, bullfighting, bribing each other, and being a bunch of incompetent parasites to be fiscally responsible. This is as true as the one about Palestinians constituting an invented people, or Telettubies being homosexual. Southern Europe does have lower per-capita income and productivity levels than the north, but working hours are around or above the EU average.
More specifically, the Spanish, Portuguese, and to a lesser extent Irish cases are presented through Greek lens. In Greece, the government (assisted by Goldman Sachs) masked its growing debt to comply with European standards. Corruption is rampant throughout the country, and the Greek state lacks the capacity to implement effective taxation. Ireland is an entirely different story. Portugal did run deficits throughout the 2000s –but has compliantly followed each and all of the Troika’s guidelines (diktats?) since it was bailed out. Spain is far from being free of corruption, but it doesn’t face the same taxation problems as Greece. More importantly, the country was running budget surpluses up until 2007, while Germany broke the Maastricht Treaty by being “fiscally irresponsible.”
Second, it doesn’t work. If your economy is contracting, it becomes harder to pay your debts no matter how much you slash through the budget –especially since budget cuts further depress growth rates. The IMF’s latest World Economic Outlook makes this quite clear. It places Greece and Spain at the very bottom of global growth, and suggests European governments miscalculated the multiplier effect of spending cuts and higher taxation. In other words, the damage produced to GDP growth by austerity offsets the intended deficit reduction. Unsurprisingly, Germany has largely ignored the IMF report.
Granted, some cuts will be inevitable in a time of crisis. We can argue about what constitutes legitimate spending and what is government waste. But this shouldn’t automatically lead to throwing countercyclical policies overboard. And it cannot justify cuts in healthcare and education that in the long run will simply lock half of Europe into uncompetitiveness.
What is to be done?
A short answer would require several posts. But in a nutshell, three ideological shifts are necessary. The first is looking at debt as an economic instead of a moral problem. (Interestingly, the German words for debt and guilt share an etymological root). The second is looking at the Eurocrisis as a political instead of an economic problem –more of this on future posts. The third is making Berlin understand austerity is worse than inflation. Germany’s fear of inflation is grounded on the assumption that it leads to hyperinflation, and hyperinflation leads to the election of Adolph Hitler. To avoid such an outcome, the reasoning goes, the European Central Bank must be stopped from acting as a lender of last resort and austerity must be implemented.
…The problem is austerity is also socially destructive, and it is fueling the rise of a Nazi party in Greece. History repeats itself. The first time as tragedy, the second time as farce.
great post!