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Forcing Europe to rethink its painful embrace of austerity

LONDON >> As Europe has grappled with the trauma of a devastating financial and economic crisis, policymakers have consistently relied on one approach to managing the damage — budget austerity.

Shrink government spending by trimming pensions and cutting social programs, the logic runs, and the markets will gain confidence in the tough-minded people in charge. Confident markets make for happy markets. Money will pour in, and good times will roll.

Even as prosperity has remained painfully elusive across much of Europe, leaders have time and again renewed their faith in the virtues of this harsh medicine.

Until now.

Some policymakers are flashing tentative signs that they may be prepared to slacken their grip on public coffers to spur growth and improve the lot of ordinary people suffering joblessness and diminished wealth. In the clearest sign of this shift, the heavily indebted Italy is increasingly inclined to challenge Germany — the guardian of austerity — to loosen European purse strings.

The development comes after Britain’s stunning vote to abandon the European Union, an angry rebuke of the economic elite within struggling communities, and as populist, anti-immigrant movements across the Continent gain traction.

Above all, the change could be an antidote to years of dogmatic European policies, replacing a failed effort to generate economic growth through cutting spending with a focus on bolstering investment.

“Austerity is out of the discussion in a way,” the Italian finance minister, Pier Carlo Padoan, said during a recent interview in Rome. “We need to bring more growth and more jobs to Europe.”

The most obvious place the new dynamic is unfolding is in Britain.

Before the June 23 vote for “Brexit,” the man in charge of the budget, the chancellor of the Exchequer, George Osborne, was publicly pursuing the aim of delivering a budget surplus by 2020. The target required cuts.

But as the political class absorbed the ballot result, interpreting it as a demand for redress from communities reeling from high unemployment and wage stagnation, Osborne acknowledged that his goal could no longer be achieved.

His successor, Philip Hammond, has raised the ante.

In a speech last Monday at an annual gathering of the governing Conservative Party, the new chancellor declared that the government would borrow more to finance new infrastructure projects — presumably creating construction and manufacturing jobs.

Budget cutting has given way to fresh spending in large part because of fears of the economic consequences of Britain’s potentially tortuous European divorce proceedings. Investment is expected to slow, reflecting grave uncertainty. British exports could be threatened. High-paying finance jobs could shift from Britain to other countries in Europe.

But any fair conversation about austerity must reckon with a complex reality: There are great divergences between the rhetoric of policymaking and the actual spending of money.

In Britain, Osborne presented himself as a courageous guardian of the Treasury, intent on making cuts to balance the books. At the same time, he ran budget deficits that were proportionately larger than those in France, where a Socialist government, supposedly intent on handing out loot unencumbered by arithmetic, was in power.

In the United States, the Obama administration responded to the Great Recession with a $787 billion fiscal stimulus bill — a mixture of tax cuts and increased government spending. Its economy proceeded to recover more vigorously than Europe’s, giving rise to the notion that stimulus was at work on the U.S. side of the Atlantic, while austerity prevailed across the water.

The European Union maintains rules limiting budget deficits and public debt burdens. Countries that exceed the limits are subject to negotiations over the consequences.

To Germany, those rules are immutable (unless Germany is the one asking for some slack). The German economic view, analysts say, is dominated by moralistic judgments and a grave fear of inflation. Deficits reflect weakness of will and undermine the value of money. Prosperity comes from discipline and sacrifice.

German voters have expressed alarm at any possibility that their abundant savings might be used to rescue reckless borrowers on the Mediterranean. This trait has been most on display as Germany has demanded sharp cuts in government spending as a condition for successive bailouts of Greece by European authorities. But it has similarly colored German demands for strict adherence to the limits on deficit spending by Spain, Portugal and other crisis-assailed European nations. (And never mind, critics charge, that most troubled European economies landed there not because of too much public spending, but because of disastrous private borrowing — often extended by German banks.)

“On the merits, Spain, Italy and France should be ganging up on the Germans and outvoting them and strong-arming them,” said Adam S. Posen, a former member of the rate-setting committee at the Bank of England, and now president of the Peterson Institute for International Economics in Washington. “For whatever reason, they don’t get there, and I genuinely don’t understand it.”

Italy is now making a run at it.

Last month, its prime minister, Matteo Renzi, accused Germany of putting European interests at risk by refusing to allow more government spending.

“Stressing austerity means destroying Europe,” Renzi declared before the Council on Foreign Relations in New York. “Which is the only country which receives an advantage from this strategy? The one which exports the most: Germany.”

In a series of recent interviews in Rome, top Italian officials outlined intentions to liberate Europe from austerity.

“If you want to close this divide and you want to persuade your citizens that there is opportunity in the internationalization of the economy and innovation, you need to invest a lot,” said the Italian minister of economic development, Carlo Calenda. “The question is whether you do it within the European rule or whether you break the European rule. What we are trying to do is to stay within the European rule.”

But not forever, Calenda added. Greece confronted Germany loudly and directly as it submitted to wrenching cuts as a condition of the bailouts. Italy is mounting a quieter challenge, operating within the rules while finding favorable interpretations that allow greater spending.

“We do think there is space to maneuver in order to change the European rule,” he said. “If we will be in a situation where we need to act in a stronger way, especially on fiscal space, then we will take that into consideration.”

One response to “Forcing Europe to rethink its painful embrace of austerity”

  1. noheawilli says:

    What a horrible misunderstanding of economics. Doubling the US debt was an irresponsible action that did not result in its predicted goals. When you look at a nations gdp, which category of spending is the largest? That’s your economy.

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