The austerity vs. growth argument is hotting up

The G8 and eurozone summits show that leaders still have a long way to go.

With a G8 summit one week and an EU summit the next we have the latest act of a seemingly interminable eurozone crisis. The solutions needed now are almost exactly the same as a year ago: Europe's banks, particularly in Spain and France need to be re-capitalised; the European Central Bank needs to maintain its presence in the bond market; and, most importantly, we need a concerted stimulus programme aimed primarily at southern Europe to prevent a deep recession.

So, what’s new, you might ask.

Well, the G8 summit saw the first serious growth vs austerity battle, with Obama and Hollande leading the pro-stimulus camp against Angela Merkel. Although Merkel’s refusal to cave in to demands for, amongst other things, a relaxation of deficit reduction targets, Eurobonds and quantitative easing by the European Central Bank, is clear from the summit communique, she is becoming increasingly isolated. Later this week EU leaders will meet in Brussels for a mini-summit convened by Herman Van Rompuy, and it will be interesting to see whether Merkel’s stance softens or hardens.

The election results in France and Greece made it inevitable, but it is clear that the terms of debate have shifted in the last few weeks as politicians realise that the immediate priority is to escape recession rather than cut deficits.

This is not deficit denial but common sense. A sustainable debt and deficit reduction programme cannot be achieved in countries with shrinking output, and it is an economic nonsense to suggest otherwise. A quick glance across the Atlantic should offer some guidance. Things are not exactly rosy in the US, which is still wrestling with high debt and deficit levels, but, unlike the eurozone, US economic output is rising and unemployment falling. A report published last month by Oxford Economics and the rating agency Fitch claimed that President Obama's stimulus package has been worth an extra 4% of GDP and that, without it, the US economy would still be "mired in recession".

There is also a bit of wriggle room for a targeted stimulus. European Commission officials have been talking about providing an extra €10 billion to the European Investment Bank and allocating about €80 billion in unused structural funds to fund infrastructure projects in the EU. There is also widespread support for setting up joint liability EU ‘project bonds’.

Unfortunately putting these policies into action is still not quite that straight-forward. The G8 communique, with its telling phrase that “the right measures are not the same for each of us”, reveals the divide that still exists on how best to respond.

In fact, had that line been used two years ago Europe would probably have avoided the mess it now finds itself in. The biggest mistake made by the EU’s predominantly conservative leaders has been to insist that austerity and nothing else is the “right measure” for everybody.

But a closer look reveals that the EU countries facing difficulties all have different problems. Ireland was brought down by a property binge financed by its banks which were then left horribly exposed to sub-prime mortgages. Spain does not have high government debt but its banks hold multi-billion euro losses from real estate alongside dangerously high unemployment particularly among young people. Italy has one of the lowest budget deficits in Europe but a high debt to GDP ratio. Only Greece has deep-rooted structural problems. All of them would benefit from a targeted stimulus package which, unlike a diet consisting solely of cuts, would give them the economic stability needed for fiscal consolidation.

The main questions facing the EU are not about the fate of the euro. They are on how eurozone countries can generate the economic output to move towards balancing their books and, secondly, about the democratic legitimacy of applying the terms of the rescue packages.
A situation where unelected technocrat governments push through unpopular economic reforms is a dangerous recipe for civil unrest. Without a democratic mandate to implement the terms of their rescue programmes it is hard to see how they will be successful.

As yet, no country has had a referendum on the rescue programmes their leaders signed up to. Only in Spain and Portugal can it be argued that the governments have a mandate for cuts, while Ireland will vote on the fiscal compact treaty later this month. It might be in everyone's interest - both the creditor and debtor countries- for all the countries needing emergency support to hold national referendums on whether to remain in the euro. This would force politicians at national and European level to candidly weigh up the pros and cons of the recovery programmes and their membership of the euro.

The euro is - as it has been from the start - in the hands of Europe's leaders, who have so far been unwilling or unable to spell out the reality of the options open to their electorates. They need to be clear on three points: the structure of the single currency requires reform if it is to work; debt reduction is not optional; and austerity without growth is a road to ruin. The sooner politicians from creditor and debtor countries swallow their pride and correct their mistakes the better.

The G8 summit Photograph: Getty Images
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How Theresa May laid a trap for herself on the immigration target

When Home Secretary, she insisted on keeping foreign students in the figures – causing a headache for herself today.

When Home Secretary, Theresa May insisted that foreign students should continue to be counted in the overall immigration figures. Some cabinet colleagues, including then Business Secretary Vince Cable and Chancellor George Osborne wanted to reverse this. It was economically illiterate. Current ministers, like the Foreign Secretary Boris Johnson, Chancellor Philip Hammond and Home Secretary Amber Rudd, also want foreign students exempted from the total.

David Cameron’s government aimed to cut immigration figures – including overseas students in that aim meant trying to limit one of the UK’s crucial financial resources. They are worth £25bn to the UK economy, and their fees make up 14 per cent of total university income. And the impact is not just financial – welcoming foreign students is diplomatically and culturally key to Britain’s reputation and its relationship with the rest of the world too. Even more important now Brexit is on its way.

But they stayed in the figures – a situation that, along with counterproductive visa restrictions also introduced by May’s old department, put a lot of foreign students off studying here. For example, there has been a 44 per cent decrease in the number of Indian students coming to Britain to study in the last five years.

Now May’s stubbornness on the migration figures appears to have caught up with her. The Times has revealed that the Prime Minister is ready to “soften her longstanding opposition to taking foreign students out of immigration totals”. It reports that she will offer to change the way the numbers are calculated.

Why the u-turn? No 10 says the concession is to ensure the Higher and Research Bill, key university legislation, can pass due to a Lords amendment urging the government not to count students as “long-term migrants” for “public policy purposes”.

But it will also be a factor in May’s manifesto pledge (and continuation of Cameron’s promise) to cut immigration to the “tens of thousands”. Until today, ministers had been unclear about whether this would be in the manifesto.

Now her u-turn on student figures is being seized upon by opposition parties as “massaging” the migration figures to meet her target. An accusation for which May only has herself, and her steadfast politicising of immigration, to blame.

Anoosh Chakelian is senior writer at the New Statesman.

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