Vot­ers in France and Greece give the thumbs down to fis­cal con­ser­vatism. The sen­ti­ment Is fast spread­ing across the con­ti­nent.

India Today - - THE WORLD - By Ni­cholas Wap­shott The writer is the au­thor of Keynes Hayek: The Clash That De­fined Mod­ern Eco­nom­ics

The elec­tion re­sults in France and Greece, re­ject­ing their gov­ern­ments’ harsh eco­nomic poli­cies and de­mand­ing a softer road to fis­cal re­demp­tion, rep­re­sent the lat­est bat­tle in an in­tel­lec­tual war that has been go­ing on for more than 80 years.

In the au­tumn of 1931, the Bri­tish econ­o­mist John May­nard Keynes turned to face his most in­tran­si­gent foe, Friedrich Hayek, to ar­gue that when an econ­omy is in re­ces­sion, it is the gov­ern­ment’s duty to in­ter­vene to re­store growth and boost em­ploy­ment. He sug­gested low in­ter­est rates, deep tax cuts, and public spend­ing to bol­ster de­mand, paid for by gov­ern­ment bor­row­ing. The Aus­trian econ­o­mist coun­tered that such ac­tions would per­vert the ‘ nat­u­ral’ op­er­a­tion of the free mar­ket and would at best only post­pone the painful day of reck­on­ing.

De­spite months of vi­tu­per­a­tive ar­gu­ment, which the dis­tin­guished pro­fes­sor of eco­nom­ics at Cam­bridge, Al­bert Pigou, de­scribed as “con­ducted in the man­ner of Kilkenny cats”, the two thinkers never set­tled the pro­found dif­fer­ences be­tween them. Po­lit­i­cal econ­o­mists and fi­nance min­is­ters have been ar­gu­ing the point ever since.

The Keynes- Hayek di­vide con­tin­ues to dom­i­nate po­lit­i­cal dis­course in Amer­ica, the Euro­pean Union and Bri­tain, as gov­ern­ments wres­tle with the eco­nomic dis­as­ter left by the stock mar­ket col­lapse of 2008 and the sub­se­quent freez­ing of fi­nan­cial in­sti­tu­tions. At first, the Key­ne­sians were on the as­cen­dant as US Pres­i­dent Ge­orge W. Bush and then Barack Obama hosed public money at banks to pre­vent them from col­laps­ing. This was fol­lowed by a Key­ne­sian stim­u­lus of nearly $ 1 tril­lion spent on tax breaks, hand­outs to the needy, bail­ing out the fail­ing mo­tor in­dus­try and bank­rupt state gov­ern­ments, as well as the fund­ing of large- scale in­fra­struc­ture projects.

But no sooner had Key­ne­sian mea­sures been in­tro­duced than there was buy­ers’ re­morse. In Amer­ica, an­gry tax­pay­ers, pressed by high debt and the prospect of job­less­ness, formed the Tea Party to pe­ti­tion law­mak­ers to not only halt gov­ern­ment bor­row­ing, but to lower taxes.

Obama soon found he could not per­suade the Hayekians in Congress to agree a fur­ther $ 500 bil­lion stim­u­lus he in­sisted was es­sen­tial to put Amer­i­cans back to work. In­stead, af­ter win­ning the mid- term elec­tions, Repub­li­cans re­fused to com­pro­mise and the work of the


fed­eral gov­ern­ment ground to a halt.

A sim­i­lar story of blow­ing hot and cold on the need for gov­ern­ment in­ter­ven­tion took place in Bri­tain, where the Key­ne­sian Gor­don Brown was ousted and re­placed by David Cameron’s coali­tion which pledged to bal­ance the na­tional bud­get within five years by im­pos­ing spend­ing cuts of £ 130 bil­lion and by fir­ing 5,00,000 public sec­tor work­ers.

In Europe, to pro­tect the value of the sin­gle cur­rency, the euro, Ger­man Pres­i­dent An­gela Merkel in­sisted that gov­ern­ments must pay their debts with­out de­lay, by im­pos­ing cuts and re­dun­dan­cies as sav­age as those in Bri­tain. The re­sult of such a harsh reg­i­men has been wide­spread mis­ery in coun­tries such as Spain, Italy, Por­tu­gal, Ire­land, and Greece which have over the decades ac­crued mas­sive public debt bur­dens. And one by one, as the tough poli­cies have taken hold, the peo­ple have re­belled.

The re­volt against aus­ter­ity has so far bro­ken 11


Euro­pean gov­ern­ments, and last week­end top­pled Niko­las Sarkozy in France and Lu­cas Pa­pade­mos in Greece. Those, such as the French So­cial­ist Fran­cois Hol­lande, who have taken their place, are de­mand­ing that Merkel re­think her hard- nosed poli­cies and re­place them with kinder Key­ne­sian mea­sures.

So, af­ter a Key­ne­sian re­nais­sance fol­lowed by a Hayekian ‘ Aus­trian eco­nom­ics’ re­trench­ment, are the Key­ne­sians once more on the as­cen­dant? It seems so. Hol­lande’s first trip abroad is to Ber­lin, where his top pri­or­ity is to en­cour­age Merkel to change her mind about in­sist­ing on fi­nan­cial con­ti­nence through­out Europe. He will ar­gue that the pri­or­ity for the Euro­pean Union should be a Key­ne­sian pro­gramme to cre­ate new jobs and he will sug­gest that the prob­lem with her sound money, anti- in­fla­tion al­ter­na­tive is that it has sim­ply not worked. He might cite the ex­pe­ri­ence of the Bri­tish, whose ur­gent ef­forts to bal­ance the books have turned a once re­cov­er­ing econ­omy into a dou­ble- dip re­ces­sion. He could point at Ire­land, whose public sec­tor cuts of 14 per cent have driven the coun­try into neg­a­tive growth. In Spain, even be­fore a sin­gle gov­ern­ment job has been lost through aus­ter­ity, the econ­omy has tipped back into re­ces­sion. Across the euro­zone, un­em­ploy­ment is now 10.9 per cent and ris­ing.

The votes against aus­ter­ity in Europe are be­ing watched care­fully in both Wall Street and the White House as an in­di­ca­tor of what may hap­pen in the pres­i­den­tial elec­tion in Novem­ber. Like Merkel, Obama’s Re­pub­li­can chal­lenger Mitt Rom­ney is com­mit­ted to a hard line against gov­ern­ment deficits and bor­row­ing, but Europe is pro­vid­ing ev­i­dence that such fis­cal pro­bity takes a long time to work, if it works at all, and comes at a heavy po­lit­i­cal price. Obama may now hope vot­ers have got the mes­sage that the Tea Party al­ter­na­tive is hor­ri­bly painful.

Fis­cal con­ser­va­tives look askance at Hol­lande and his Key­ne­sian friends, be­liev­ing it is no more sen­si­ble to try to defy the mar­ket than to defy grav­ity. It is the money mar­kets that will make their judg­ment on whether a gov­ern­ment is fis­cally con­ti­nent, by fix­ing the level of in­ter­est levied on new gov­ern­ment bor­row­ing. To defy the mar­kets, Hol­lande must con­vince Merkel it is in her in­ter­est to al­low the Euro­pean Cen­tral Bank to bol­ster Europe’s frag­ile banks and buy gov­ern­ment debt at a rea­son­able price.

But Merkel has her own elec­toral prob­lems. Next year, she must con­vince Ger­man vot­ers she has pro­tected both the Euro­pean Union and the euro, which hold the key to Ger­many’s con­tin­u­ing pros­per­ity, while safe­guard­ing them from what they con­sider reck­less and prof­li­gate be­hav­iour by their in­debted south­ern Euro­pean neigh­bours. Since the Sec­ond World War, Ger­mans have been pre­pared, if not happy, to sub­sidise the rest of Europe, but now a new gen­er­a­tion of young Ger­mans, who have no guilt about their coun­try’s Nazi past, are grow­ing im­pa­tient at hav­ing to bail out those they be­lieve do not work as hard as they do.

The last word, how­ever, goes to Keynes. In his Eco­nomic Con­se­quences of the Peace, he pre­dicted that if at the end of the First World War the vic­to­ri­ous Al­lies beg­gared the de­feated Ger­mans with crip­pling repa­ra­tions, ex­trem­ist pol­i­tics would arise that would lead to a sec­ond world war. He was proved calami­tously right.

Now, it is the Ger­mans who are de­mand­ing their Euro­pean part­ners en­dure swinge­ing aus­ter­ity for at least a decade. With the re­cent elec­toral suc­cess of ex­treme par­ties, we are al­ready see­ing ev­i­dence of the dan­ger­ous trend that Keynes proph­e­sied more than 90 years ago.





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