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
Dan Kitwood/Getty
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I believe only Yvette Cooper has the breadth of support to beat Jeremy Corbyn

All the recent polling suggests Andy Burnham is losing more votes than anyone else to Jeremy Corbyn, says Diana Johnson MP.

Tom Blenkinsop MP on the New Statesman website today says he is giving his second preference to Andy Burnham as he thinks that Andy has the best chance of beating Jeremy.

This is on the basis that if Yvette goes out first all her second preferences will swing behind Andy, whereas if Andy goes out first then his second preferences, due to the broad alliance he has created behind his campaign, will all or largely switch to the other male candidate, Jeremy.

Let's take a deep breath and try and think through what will be the effect of preferential voting in the Labour leadership.

First of all, it is very difficult to know how second preferences will switch. From my telephone canvassing there is some rather interesting voting going on, but I don't accept that Tom’s analysis is correct. I have certainly picked up growing support for Yvette in recent weeks.

In fact you can argue the reverse of Tom’s analysis is true – Andy has moved further away from the centre and, as a result, his pitch to those like Tom who are supporting Liz first is now narrower. As a result, Yvette is more likely to pick up those second preferences.

Stats from the Yvette For Labour team show Yvette picking up the majority of second preferences from all candidates – from the Progress wing supporting Liz to the softer left fans of Jeremy – and Andy's supporters too. Their figures show many undecideds opting for Yvette as their first preference, as well as others choosing to switch their first preference to Yvette from one of the other candidates. It's for this reason I still believe only Yvette has the breadth of support to beat Jeremy and then to go on to win in 2020.

It's interesting that Andy has not been willing to make it clear that second preferences should go to Yvette or Liz. Yvette has been very clear that she would encourage second preferences to be for Andy or Liz.

Having watched Andy on Sky's Murnaghan show this morning, he categorically states that Labour will not get beyond first base with the electorate at a general election if we are not economically credible and that fundamentally Jeremy's economic plans do not add up. So, I am unsure why Andy is so unwilling to be clear on second preferences.

All the recent polling suggests Andy is losing more votes than anyone else to Jeremy. He trails fourth in London – where a huge proportion of our electorate is based.

So I would urge Tom to reflect more widely on who is best placed to provide the strongest opposition to the Tories, appeal to the widest group of voters and reach out to the communities we need to win back. I believe that this has to be Yvette.

The Newsnight focus group a few days ago showed that Yvette is best placed to win back those former Labour voters we will need in 2020.

Labour will pay a massive price if we ignore this.

Diana Johnson is the Labour MP for Hull North.