Europe’s aus­ter­ity zom­bies

Financial Mirror (Cyprus) - - FRONT PAGE -

“If the facts don’t fit the the­ory, change the the­ory,” goes the old adage. But too of­ten it is eas­ier to keep the the­ory and change the facts – or so Ger­man Chan­cel­lor An­gela Merkel and other pro-aus­ter­ity Euro­pean lead­ers ap­pear to be­lieve. Though facts keep star­ing them in the face, they con­tinue to deny re­al­ity.

Aus­ter­ity has failed. But its de­fend­ers are will­ing to claim vic­tory on the ba­sis of the weak­est pos­si­ble ev­i­dence: the econ­omy is no longer col­laps­ing, so aus­ter­ity must be work­ing! But if that is the bench­mark, we could say that jumping off a cliff is the best way to get down from a moun­tain; after all, the de­scent has been stopped.

But ev­ery down­turn comes to an end. Suc­cess should not be mea­sured by the fact that re­cov­ery even­tu­ally oc­curs, but by how quickly it takes hold and how ex­ten­sive the dam­age caused by the slump.

Viewed in th­ese terms, aus­ter­ity has been an ut­ter and un­mit­i­gated dis­as­ter, which has be­come in­creas­ingly ap­par­ent as Euro­pean Union economies once again face stag­na­tion, if not a triple-dip re­ces­sion, with un­em­ploy­ment per­sist­ing at record highs and per capita real (in­fla­tion-ad­justed) GDP in many coun­tries re­main­ing be­low pre-re­ces­sion lev­els. In even the best-per­form­ing economies, such as Ger­many, growth since the 2008 cri­sis has been so slow that, in any other cir­cum­stance, it would be rated as dis­mal.

The most af­flicted coun­tries are in a de­pres­sion. There is no other word to de­scribe an econ­omy like that of Spain or Greece, where nearly one in four peo­ple – and more than 50% of young peo­ple – can­not find work. To say that the medicine is work­ing be­cause the un­em­ploy­ment rate has de­creased by a cou­ple of per­cent­age points, or be­cause one can see a glim­mer of mea­ger growth, is akin to a me­dieval bar­ber say­ing that a blood­let­ting is work­ing, be­cause the pa­tient has not died yet.

Ex­trap­o­lat­ing Europe’s mod­est growth from 1980 on­wards, my cal­cu­la­tions show that out­put in the eu­ro­zone to­day is more than 15% be­low where it would have been had the 2008 fi­nan­cial cri­sis not oc­curred, im­ply­ing a loss of some $1.6 trln this year alone, and a cu­mu­la­tive loss of more than $6.5 trln. Even more disturbing, the gap is widen­ing, not clos­ing (as one would ex­pect fol­low­ing a down­turn, when growth is typ­i­cally faster than nor­mal as the econ­omy makes up lost ground).

Sim­ply put, the long re­ces­sion is low­er­ing Europe’s po­ten­tial growth. Young peo­ple who should be ac­cu­mu­lat­ing skills are not. There is over­whelm­ing ev­i­dence that they face the prospect of sig­nif­i­cantly lower lifetime in­come than if they had come of age in a pe­riod of full em­ploy­ment.

Mean­while, Ger­many is forc­ing other coun­tries to follow poli­cies that are weak­en­ing their economies – and their democ­ra­cies. When cit­i­zens re­peat­edly vote for a change of pol­icy – and few poli­cies mat­ter more to cit­i­zens than those that af­fect their stan­dard of liv­ing – but are told that th­ese mat­ters are de­ter­mined else­where or that they have no choice, both democ­racy and faith in the Euro­pean project suf­fer.

France voted to change course three years ago. In­stead, vot­ers have been given another dose of pro-business aus­ter­ity. One of the long­est-stand­ing propo­si­tions in eco­nomics is the bal­anced-bud­get mul­ti­plier – in­creas­ing taxes and ex­pen­di­tures in tan­dem stim­u­lates the econ­omy.

And if taxes tar­get the rich, and spend­ing tar­gets the poor, the mul­ti­plier can be es­pe­cially high. But France’s so-called so­cial­ist gov­ern­ment is low­er­ing cor­po­rate taxes and cut­ting ex­pen­di­tures – a recipe almost guar­an­teed to weaken the econ­omy, but one that wins ac­co­lades from Ger­many.

The hope is that lower cor­po­rate taxes will stim­u­late in­vest­ment. This is sheer non­sense.

What is hold­ing back in­vest­ment (both in the United States and Europe) is lack of de­mand, not high taxes. In­deed, given that most in­vest­ment is fi­nanced by debt, and that in­ter­est pay­ments are tax-de­ductible, the level of cor­po­rate tax­a­tion has lit­tle ef­fect on in­vest­ment.

Like­wise, Italy is be­ing en­cour­aged to ac­cel­er­ate pri­vati­sa­tion. But Prime Min­is­ter Mat­teo Renzi has the good sense to recog­nise that sell­ing na­tional as­sets at fire-sale prices makes lit­tle sense. Long-run con­sid­er­a­tions, not short-run fi­nan­cial ex­i­gen­cies, should de­ter­mine which ac­tiv­i­ties oc­cur in the pri­vate sec­tor. The decision should be based on where ac­tiv­i­ties are car­ried out most ef­fi­ciently, serv­ing the in­ter­ests of most cit­i­zens the best.

Pri­vati­sa­tion of pen­sions, for ex­am­ple, has proved costly in those coun­tries that have tried the ex­per­i­ment. Amer­ica’s mostly pri­vate health-care sys­tem is the least ef­fi­cient in the world. Th­ese are hard ques­tions, but it is easy to show that sell­ing state-owned as­sets at low prices is not a good way to im­prove long-run fi­nan­cial strength.

All of the suf­fer­ing in Europe – in­flicted in the ser­vice of a man-made ar­ti­fice, the euro – is even more tragic for be­ing un­nec­es­sary. Though the ev­i­dence that aus­ter­ity is not work­ing con­tin­ues to mount, Ger­many and the other hawks have dou­bled down on it, bet­ting Europe’s fu­ture on a longdis­cred­ited the­ory. Why pro­vide econ­o­mists with more facts to prove the point?

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