It did not take long for those flying the flag of fiscal austerity in Europe to turn tail. A week ago in this space I asserted that it was the beginning of the end for the “austerians.” I was too cautious. The post-austerity dawn is upon us and so are the big new questions: What is this new start going to look like? What is the policy mix? How is it going to work?
First, Europeans cannot take this occasion to abandon all thought of austerity, discipline, and fiscal responsibility. That thought belongs to intellectually challenged lefties. The point is to develop policies customized to the needs of each nation that (1) bring down debt at a humane pace, and (2) lay groundwork for long-term growth-- and therefore revenue.
Leonardo Domenici, an Italian member of the European parliament, calls the thought “austerity with a human face.” Austerity policies have been an entrenched orthodoxy across the European Union since the sovereign crises began in 2010. Advance any other idea and you were a “spendarian”—a term just coined by Oli Rehn, the EU’s austerian equivalent of an economics minister. But listen to a few of the big voices in government and the investment community now:
• Enrico Letta, on being nominated Italy’s next prime minister at midweek: “Europe’s policy of austerity is no longer sufficient.”
• Mario Barroso, president of the European Commission, a day earlier: “While this policy is fundamentally right, I think it has reached its limit. A policy, to be successful, has to have the minimum of political and social support.”
• William Gross, who manages a bond fund (at $289 billion, the world’s largest) for Pimco: “The UK and almost all of Europe have erred in terms of believing that austerity, fiscal austerity in the short term, is the way to produce real growth. It is not. You’ve got to spend money.”
They all spoke over the past few days. And the about-face they reflect comes none too soon. It was a miserable week in Europe. Spain’s jobless count is now nearing 30 percent—a record. France set another record, with almost 11 percent out of work. The EU’s deficit target—no higher than 3 percent of gross domestic product—is becoming a notional number. Portugal and Ireland now have seven-year extensions; Brussels is about to grant France, Spain, and the Netherlands extensions of one duration or another.
Altogether, the recession identified until now with the “Club Med” nations is creeping northward. The Scandinavians, the Dutch and Belgians, the French, and even the Germans are one quarter of negative growth away from recession. Europe’s jobless rates are almost uniformly awful. In Ireland, which has taken its medicine and is growing, unemployment is 14.2 percent.
The austerians have had three years at bat and it is a disgraceful record. But what happens now? There are two political questions..
First, how will European leaders and policymakers in Brussels and Frankfurt respond to the new winds blowing through Europe? The EU has taken ameliorating steps over the past year or so, but there are no big policy shifts on the boards.
The leftish Enrico Letta, whose government was sworn in Sunday in Rome, has made his pro-growth intentions clear. But even in the Italian case, we have to watch and see what will and will not prove acceptable.
Second, will a more Keynesian approach to recovery weaken the EU’s unity so that nothing at all gets done? This is a considerable danger, notably in Germany. That is why Chancellor Angela Merkel is, without question, the most important person walking around in Europe today. And her task is tough.
Germany is the intellectual homeland of all austerians. With elections coming in September, it is up to Merkel to balance an increasingly disenchanted electorate, brimming with fiscal rectitude and ire toward southern Europe, against what she knows is right: a European Germany, a Germany that understands the crisis to be not Greek or Italian or Spanish but European by way of its causes and its solutions both.
“I think the Germans have not yet made the choice,” Martin Schulz, a German himself and president of the EU parliament, told the Financial Times recently. “It is undecided which direction Germany will go.” This is exactly right, so we have to watch the doings in Berlin, too.
There is one other dimension to the German question, and it could be decisive. It is the Franco–German relationship. Apart from Germans who want to jettison Europe, Merkel has to worry about the opposite— German isolation within Europe.
There is no love lost, it seems, between Merkel and French President François Hollande. But Berlin is running the distance to display its sympathy (if not enthusiasm) for Hollande’s Socialist-influenced recovery strategies. Paris becomes Berlin’s best chance for an ally in the new debate on fiscal consolidation.
When this debate gets down to substantial matters—real, live policies,, here are four strategies that could lift the EU out of the mire.
• In the short term, get growth going as quickly as possible. This means fast, front-loaded stimulus programs of the kind Japan, for instance, is now introducing. “More from the core” is crucial: Europe needs German demand, for example. The Greeks and Italians cannot do this alone.
• Looking further out, the need is to reduce long-term public expenditures while developing long-term income generators. The former means politically accepted reforms—austerity with a comprehending electorate behind it. The latter means spending on public capital. Schools, roads, and all manner of other public goods are long-term revenue generators. You have to wonder how the Western world lost track of this simple thought.
• Corruption has to go. Even if you analyze it as some sort of cultural proclivity, it is now too costly, too tragic, and too demeaning of those who live with it.
• Ditto the ridiculous extent of tax truancy in Greece, Italy, and elsewhere. Being a good social democrat does not entitle anybody to sanctuary from the revenue collector. There is a degree of tolerance in some European countries that is very yesterday.
And Europe has to look to tomorrow now.
