Austerity
policies have proved to be wrong in Europe and efforts of the EU and the ECB to
contain the crisis rather ineffective. L. Summers, a former US Treasury secretary wrote in FT (April
30): "Treating symptoms rather than, causes is usually a good way to make
a patient worse". This is what is happening in Europe where the problem is
growth, not excessive deficits. This is now becoming evident, even for the most
orthodox defenders of fiscal rigour. Now that the ideological veil has dropped,
more pragmatic solutions in favour of growth enhancing policies are being
envisaged.
What went wrong in Europe? Increased austerity has not restored normal
financial conditions, but has actually worsened access to financial markets.
Public spending reduction reduces income, so the ability to repay debts. In
fact, as happened in Greece, massive budget cuts have produced only limited
reductions in deficits. This , in turn, reduces the growth potential if capital
investments fall sharply and prospects to get the unemployed back to work are
becoming more difficult. In Europe, due to economic integration, these effects
are amplified. A recession in one country produces a fall in demand in others.
Increase in savings and exports in one country have to be compensated by equal
increase in spending and importing in others. Germany's performance has been
achieved by becoming a huge net exporter but this would not have been possible
without large scale borrowing and importing by Europe's peripheral countries.
Peripheral countries will not be able to reduce their debt substantially if at
the same time Germany pursues the same policies aiming at increasing its
surplus.
Orthodox
economists will argue that more spending in countries with large debt is pure
madness. They are wrong: if demand falls and unemployment continues to raise,
austerity measures will simply become ineffective and people will continue
suffering. Obviously, savings can be achieved if they are undertaken wisely,
for example to reduce waste of public money. But one thing is to reduce
inefficiencies, another is to cut in basic services such as heath care and
education which are vital for the well being of citizens.
Policies to
increase public spending on investment would then make sense if they are coordinated
at European level. The ECB is now pledging for a 'growth compact', being
conscious that its massive injection of liquidity at a very low
interest for three years has not resolved the crisis. As the recession in the
eurozone is likely to worsen, European leaders are determined to restore
growth. But this can be pursued in different ways. Merkel and Draghi support
growth initiatives through 'structural reforms', an old euphemism which
covers essentially wage cuts and less protection for workers.
F.Hollande, if
he were elected president, has pledged for a large scale plan to finance
trans-European infrastructure projects which will be financed through the
emission of bonds by the European Investment Bank. This is a promising start,
but may not be sufficient. We need certainly a common European commitment to
growth based on efficiency measures to increase productivity but also on equity
concerns to restore confidence and hope among the majority of men and women
suffering from the dangerous spiral of recession nurtured by more austerity.
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