Democracy vs. austerity

May 8, 2012

By Kathleen Brooks. The opinions expressed are her own.

Throughout history it has always been difficult to take something away from someone once you have given it to them. Europe is finding that it is extremely difficult to reign in public finances once they start to go out of control. Democracies don’t like to vote for austerity, which is why Sarkozy lost the Presidency in France, why a radical left party came second in the Greek elections and why the Conservatives got a drubbing at last week’s local elections in the UK.

This tells us something about democracy in the western world. Governments have to manage the public finances directly – they have to sell the debt, do the sums and present budgets. However, the people who vote them into (and out of) power are the public, who rightly in most cases, believe they have worked hard, paid  taxes and deserve the services and retirement promises made to them.

So here we have the problem: some governments in the West have unsustainable debt loads and deficit levels and yet they don’t have the popular mandate to try and bring that under control. That isn’t the story all over the west. The Germans and the Dutch agree that the government books should be balanced. But if you asked the rest of Europe if they wanted to reduce public debt levels to make country finances more sustainable at the expense of public services and jobs, the recent election results suggest that you would get a resounding no.

So there isn’t one unified way of thinking about austerity in the West. Some people see it as a virtue, others as a type of hell. So what to do? Europe’s one-type fits all model that is largely designed by Germany could lead to social disorder and radical political parties grabbing the reins of power in Greece. However, the more people fight against austerity the more unlikely it is that their governments can attract enough investors to buy their debt to fund their public spending needs.

So where does this vicious circle end? The answer is that no one knows. Now that the true state of public finances in Europe has been revealed it can’t be brushed under the carpet and the Greeks et al can’t go back to the pre-2007 ways of living and spending. However, the opposite – harsh austerity designed to reign in public finances at half the time it took to amass the debt in the first place – isn’t working either.

A more sensible plan is for Europe to reach some sort of compromise. Germany and Greece (as the two extremes) need to realise there are multiple views about what a democracy should provide and how public finances should be controlled. The next step is to plan a fiscal pact that allows countries to reign in public spending at the same pace as it amassed it in the first place – and fiscal targets should be spread out over 10 years rather than the current demands to bring down deficits to 3 percent of GDP by the next fiscal year. The UK could probably follow suit and realise that the debts took two parliaments to accumulate, thus it should take two parliaments to rein them in.

The Western world is at a delicate stage. The markets are likely to be unforgiving, but the if the euro zone and others don’t change and make fiscal targets more realistic, while at the same time weaning off their citizens from becoming too reliant on the state then the future looks depressing.

Image — Outgoing French President Nicolas Sarkozy (R) and newly-elected president Francois Hollande attend a ceremony at the Tomb of the Unknown Soldier at the Arc de Triomphe to commemorate the end of World War II in Paris May 8, 2012. REUTERS/Lionel Bonaventure/Pool

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