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
Getty Images.
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Europe's elections show why liberals should avoid fatalism

France, Germany and the Netherlands suggest there is nothing inevitable about the right's advance.

Humans are unavoidably pattern-seeking creatures. We give meaning to disparate events where little or none may exist. So it is with Brexit and Donald Trump. The proximity of these results led to declarations of liberalism's demise. After decades of progress, the tide was said to have unavoidably turned.

Every election is now treated as another round in the great duel between libralism and populism. In the Netherlands, the perennial nativist Geert Wilders was gifted outsize attention in the belief that he could surf the Brexit-Trump wave to victory. Yet far from triumphing, the Freedom Party finished a distant second, increasing its seats total to 20 (four fewer than in 2010). Wilders' defeat was always more likely than not (and he would have been unable to form a government) but global events gifted him an aura of invincibility.

In France, for several years, Marine Le Pen has been likely to make the final round of the next presidential election. But it was only after Brexit and Trump's election that she was widely seen as a potential victor. As in 2002, the front républicain is likely to defeat the Front National. The winner, however, will not be a conservative but a liberal. According to the post-Trump narrative, Emmanuel Macron's rise should have been impossible. But his surge (albeit one that has left him tied with Le Pen in the first round) suggests liberalism is in better health than suggested.

In Germany, where the far-right Alternative für Deutschland was said to be remorselessly advancing, politics is returning to traditional two-party combat. The election of Martin Schulz has transformed the SPD's fortunes to the point where it could form the next government. As some Labour MPs resign themselves to perpeutal opposition, they could be forgiven for noting what a difference a new leader can make.

2016 will be forever remembered as the year of Brexit and Trump. Yet both events could conceivably have happened in liberalism's supposed heyday. The UK has long been the EU's most reluctant member and, having not joined the euro or the Schengen Zone, already had one foot outside the door. In the US, the conditions for the election of a Trump-like figure have been in place for decades. For all this, Leave only narrowly won and Hillary Clinton won three million more votes than her opponent. Liberalism is neither as weak as it is now thought, nor as strong as it was once thought.

George Eaton is political editor of the New Statesman.