Europe’s morning after
Yesterday’s elections in France and Greece are being interpreted as a rejection of austerity policies. The French president-elect, Francois Hollande, had campaigned against the austere pact struck between defeated president Nicolas Sarkozy and German chancellor Angela Merkel. The leading Greek political parties had been compelled to back austerity measures as a condition of the Greek ...
Yesterday's elections in France and Greece are being interpreted as a rejection of austerity policies. The French president-elect, Francois Hollande, had campaigned against the austere pact struck between defeated president Nicolas Sarkozy and German chancellor Angela Merkel. The leading Greek political parties had been compelled to back austerity measures as a condition of the Greek bailout; they saw their combined support slide to roughly one third of the vote.
Yesterday’s elections in France and Greece are being interpreted as a rejection of austerity policies. The French president-elect, Francois Hollande, had campaigned against the austere pact struck between defeated president Nicolas Sarkozy and German chancellor Angela Merkel. The leading Greek political parties had been compelled to back austerity measures as a condition of the Greek bailout; they saw their combined support slide to roughly one third of the vote.
There is a rebellious thrill to such defiance, just as when a downtrodden employee finally tells his boss just where he can put his godforsaken job. After the thrill dissipates, it helps to have a Plan B.
In Europe’s case, there is already a rallying cry — growth! Instead of the soul-crushing paring away of social programs and the painful levying of taxes, Europe can just grow its way out of its problems. A faster-growing economy lifts people out of unemployment, reducing the need for welfare payments, and generates tax revenues as the people receive their new paychecks. The newly employed are newly confident, so they go out and spend. This further stokes the economy, creating a virtuous cycle.
The only catch is how to get this whole "growth" thing started. Here’s one idea: The countries of Europe could get together, honestly critique the structural failings that have plagued their economies, acknowledge the need for radical change, and resolve to embrace reform. The European Union could set a strategic goal "to become the most competitive and dynamic knowledge-based economy in the world, capable of sustainable economic growth with more and better jobs and greater social cohesion."
The quotes are there because this comes directly from the press release describing the EU’s Lisbon growth strategy in March 2000. The concept of growth is not a new one. That particular strategy preceded a decade in which tepid reforms in many countries, fiscal laxity, and unchecked housing bubbles left the zone in its present state. This is not to argue that a failed past run at reform precludes trying again. But it does point out the obstacles to growth by proclamation.
Where else might one look for growth? Critics of austerity will point to the possibility of false economies. For example, if a worker renounces spending on transportation in an attempt at frugality, then fails to show up at work, the ensuing loss of that worker’s job undoes any budgetary benefit from the saved gas money. The worker would have been better off spending a little to earn more. Applied to a country, the argument would be that some judiciously applied stimulus or well placed investments could launch that virtuous growth cycle described above.
That’s plausible enough. But, as with growth by proclamation, the idea of government spending to boost the economy is not a novelty in Europe. It is possible to have long, involved debates about the past effects of such spending, or whether this time would be different. In the interests of brevity, though, one can circumvent such a debate with the simple requirement that if an individual or a country is to borrow more, there must be someone willing to lend. Our worker who needs wheels for a way to work can go to the bank and get a car loan, if the bank is persuaded of the wisdom of the venture. What of France and Spain and Greece? If they are to borrow more, they must find willing lenders. At the moment, those seem rather scarce. Private credit seems to be drying up. China has been unenthused about European proposals that it buy up debt. The United States is a borrower itself, competing (successfully) for lenders’ favor. Germany could lend the money, but its skepticism led to the austerity pact in the first place.
The alternatives to austerity seem ever fewer. One popular one — a eurobond (a variant of fiscal union) — is not much different from finding willing lenders. In this case, instead of lenders, our borrowing countries just need to find someone to co-sign their loans. It has not escaped Germany’s notice that its liability as a co-signatory is not much different than it would be as a lender.
Then there is the European Central Bank. Aren’t central banks supposed to be lenders of last resort? Actually, the ECB is prohibited from funding governments this way, but it has overcome some of those inhibitions and found some clever ways around such strictures (lend the money to troubled banks, who then buy up sovereign debt). One can argue whether the risks of aggressive monetary policy outweigh the benefits (see Robert Samuelson today). In any case, the ECB has made clear that its intervention should not be seen as an easy substitute for fiscal control and reform.
If Greece were not in the euro zone, the International Monetary Fund would surely have suggested that it seek growth through a currency depreciation. That still may be Greece’s best hope, but it will hardly offer an escape from austerity. A Greece that renounced its remaining debts and left the euro would still need primary budget balance.
Europe has maneuvered itself into a difficult spot. The Keynesian prescriptions for government spending to counteract slumps presume that governments saved in the good times. Many of Europe’s troubled governments did not. That leaves them with few good options now. So, in a twist on the old cry accompanying changes in European leadership: Austerity is dead! Long live austerity!
Phil Levy is the chief economist at Flexport and a former senior economist for trade on the Council of Economic Advisers in the George W. Bush administration. Twitter: @philipilevy
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