EUROPE RISES AGAINST AUSTERITY
Voters in France and Greece give the thumbs down to fiscal conservatism. The sentiment Is fast spreading across the continent.
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
MERKELMUST RETHINK HER HARD- NOSED POLICIES AND REPLACE THEM WITH KEYNESIAN MEASURES.
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
HOLLANDE WILL ARGUE THATTHE PRIORITYFOR THE EUROPEAN UNION SHOULD BE NEWJOBS.
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.