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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The biggest divide in politics is not left against right, but liberals against authoritarians

My week, including a Lib Dem membership rise, The Avalanches, and why I'm putting pressure on Theresa May over child refugees.

It is a boost for us that Nick Clegg has agreed to return to the front line and be our Brexit spokesperson. I hadn’t even had a chance at our meeting to make him the offer when he said: “Before we start, I’ve been thinking about this and want to take on the fight over Europe.”

With Labour apparently willing to give the Tories a free pass to take us out of Europe, the Liberal Democrats are the only UK-wide party that will go into the next election campaigning to maintain our membership of the EU. The stage is remarkably clear for us to remind Theresa May precisely what she would be risking if we abandon free trade, free movement, environmental protection, workers’ rights and cross-border security co-operation. More than a month on from the referendum, all we have heard from the Tories is that “Brexit means Brexit” – but they have given us no clue that they understand what that means.

 

Premature obituaries

Not long ago, the received wisdom was that all political parties were dying – but lately the supposed corpses have twitched into life. True, many who have joined Labour’s ranks are so hard left that they don’t see winning elections as a primary (or even a desirable) purpose of a party, and opening up Labour to those with a very different agenda could ultimately destroy it.

Our experience has been happier: 20,000 people joined the Liberal Democrat fightback in the wake of the 2015 general election result, and 17,000 more have joined since the referendum. We now have more members than at any time this century.

 

Breaking up is hard to do

Journalists have been asking repeatedly if I want to see the break-up of the Labour Party, with moderates defecting to the Liberal Democrats. I have been clear that I am not a home-wrecker and it is for Labour to determine its own future, just as I focus on advancing the Liberal Democrat cause. Yet I have also been clear that I am happy for my party to be a home for liberals of whatever hue. I enjoyed campaigning in the referendum with a variety of progressive figures, just as moderates from different parties shared platforms in 1975. It struck me that far more unites us than divides us.

That said, not all “moderate” Labour figures could be described as “liberal”, as John Reid demonstrated as Labour home secretary. The modern political divide is less left v right than authoritarian v liberal. Both left and right are looking increasingly authoritarian and outright nasty, with fewer voices prepared to stand up for liberal values.

 

What I did on my holidays

Time off has been virtually non-existent, but I am reading A Wilderness of Mirrors by Mark Meynell (about loss of trust in politics, the media and just about everything). I’m also obsessively listening to Wildflower by the Avalanches, their second album, 16 years after their first. It’s outstanding – almost 60 minutes of intelligently crafted dialogue, samples and epic production.

During the political maelstrom, I have been thinking back to the idyllic few days I spent over half-term on the Scottish island of Colonsay: swimming in the sea with the kids (very cold but strangely exhilarating ­after a decent jog), running and walking. An added bonus is that Colonsay is the smallest island in the world to have its own brewery. I can now heartily recommend it.

 

Preparing for the next fight

The odds are weirdly long on an early general election, but I refuse to be complacent – and not merely because the bookies were so wrong about Brexit. If we have learned one truth about Theresa May as Prime Minister so far, it is that she is utterly ruthless. After her savage cabinet sackings, this is, in effect, a new government. She has refused to go to the country, even though she lectured Gordon Brown on the need to gain the endorsement of the electorate when he replaced Tony Blair. Perhaps she doesn’t care much about legitimacy, but she cares about power.

You can be sure that she will be keeping half an eye on Labour’s leadership election. With Jeremy Corbyn potentially reconfirmed as leader in September against the wishes of three-quarters of his MPs, Mrs May might conclude that she will never have a better chance to increase her narrow majority. Throw in the possibility that the economy worsens next year as Brexit starts to bite, and I rule nothing out.

So, we are already selecting candidates. It is vital that they dig in early. As we are the only party prepared to make the positive case for Europe, such an election would present us with an amazing opportunity.

 

Sitting Priti

David Cameron pledged to take an unspecified number of unaccompanied children from camps across the Continent. I am putting pressure on Theresa May to turn that vague commitment into a proper plan. Having visited such camps, I have been fighting for Britain to give sanctuary to a minimum of 3,000 unaccompanied children, who are currently open to the worst kinds of exploitation. We have heard nothing but silence from the government, with underfunded councils reporting that they are not receiving the help they need from Whitehall.

Meanwhile, it remains government policy to send refugees to Turkey – whose increasingly authoritarian government has just suspended human rights protection.

As if all of this were not grim enough, we have a new Secretary of State for International Development, Priti Patel, who has said that she thinks aid should be used largely to promote trade. As someone who wants our country to be respected around the world, I find this plain embarrassing. Actually, it’s worse. It’s shaming. As with Europe, so with the world: the ­Conservative government is hauling up the drawbridge just when we need more than ever to engage with people beyond our shores.

Tim Farron is the leader of the Liberal Democrats. To join the party, visit: libdems.org.uk/join

Tim Farron is leader of the Liberal Democrats.

This article first appeared in the 28 July 2016 issue of the New Statesman, Summer Double Issue