Opinion

Hugo Dixon

Austerity debate misses half the point

By Hugo Dixon
April 29, 2013

The austerity debate misses half the point. It is true that governments, especially in the euro zone, shouldn’t chase an austerity spiral ever downwards. But they can’t just sit on their hands. They must drive even harder for structural reforms.

The last few weeks have witnessed a sea-change in the debate over fiscal austerity. A seminal academic paper by Carmen Reinhart and Kenneth Rogoff, which purported to show that economic growth was impaired if government debt levels exceeded 90 percent of GDP, has been discredited.

Meanwhile, the European Commission has softened its line on the merits of further deep budget cuts in peripheral economies. Spain, for example, looks like it will get until 2016 to bring its deficit down below the European Union’s magic number of 3 percent of GDP. Portugal, Greece, Italy and France are also being shown greater leniency by Brussels. One of the first things Enrico Letta, Italy’s new prime minister, said last week was that country needed to focus on growth not austerity.

The change in attitude didn’t all happen in the past few weeks. The International Monetary Fund, which in the old days used to be considered the high priest of austerity, has been advocating looser policies for a good year. And, as more countries have got sucked into the austerity spiral – slamming on the brakes, which crushes the economy, making it harder to hit budget targets – the folly of continuing with the same policies has been hard to ignore.

It is astonishing to think that it was only in December 2011 that virtually the entire EU, including most countries outside the euro zone, signed up to the German-inspired “fiscal compact” – a misguided treaty which hardwires austerity into governments’ constitutions. It will be interesting to see whether this has any residual role or, like the euro zone’s original growth and stability pact, is viewed as a piece of waste paper.

But there are dangers in the new consensus too. The so-called austerians do have a point that excessive debt acts as a brake on an economy, even if there is no discontinuity at 90 percent of GDP. There is also the small matter of how rising debt – Italy’s is heading to 130 percent of GDP and Spain’s to over 100 percent – is going to be funded.

At the moment, the markets don’t seem worried. The ECB’s pledge to do whatever it takes to preserve the euro is keeping governments’ borrowing costs down. One of the most dramatic examples of this is Portugal, whose 10-year bonds now yield 5.9 percent down from 11.4 percent before the ECB’s jawboning.

That said, the euro crisis was not caused by austerity but rather stemmed from the fact that many economies became flabby and uncompetitive. Welfare states were too generous, labour had excessive privileges, civil services were bloated, swathes of industry were riddled with uncompetitive practices, judicial systems were sometimes dysfunctional, while tax evasion and corruption were often rife. What’s more, in many countries, there has been an unhealthy nexus between banks and politics.

These problems have been tackled, but only partly. Until they are more fully dealt with, the euro zone will not be able to return to sustained growth; unemployment, especially among the young, will stay unacceptably high; and the debt crisis will remain at risk of returning.

Look at Italy. Mario Monti, the outgoing prime minister, did reform pensions. But he botched his shake-up of the labour market, making it harder for young people to get jobs. He also failed to do much to liberalise services markets and did nothing to clean up politics. The best that can be hoped of Letta, who shouldn’t count on holding power for more than a few months, is that he will reform the electoral system. 

Things are a bit better in Spain, where labour liberalisation seems to be working. But Madrid is still being too vague on what will be in its next batch of reforms.

Meanwhile, Greece has been drinking bitter medicine for three years but has still to crack its problem of rampant tax evasion. Nor is it clear that Antonis Samaras, the Conservative prime minister, really wants to tackle vested interests in the business community.

Last but not least, France under Francois Hollande has only taken baby steps to restore its competitiveness. Public spending and taxes are too high, sucking vitality out of the private sector. Labour practices are too rigid.

More generally, right across the euro zone, banks have resisted coming clean on their bad loans. National and European policymakers have often connived in this denial, partly because the banks are well-connected and partly because doing so might require taxpayer-funded bailouts. But this is another drag on the economy.

Europe is over-dependent on a broken bank system. It should be emulating the United States which relies much more on capital markets to fund industry and households. But Brussels is deeply suspicious of markets. Indeed, its misconceived financial transactions tax will gum up financial markets, which is exactly the opposite of what is needed.

Austerity and structural reform are not the same. But they are often confused, because they both cause pain. With reform, the pain is mainly felt by well-entrenched vested interests. If the euro zone is going to have a healthy future, it must now tackle these with vigour – even as it goes easy on austerity.

Comments
12 comments so far | RSS Comments RSS

Precisely. Obama has propagated the notion that “do nothing” is an alternative to “austerity”.

$17T+ in debt, adding $3B to the federal debt every day last year and Medicare insolvency slated for 2024 point to arithmetic that dictates we must take action.

May I also remind that many Euro nations have also increased taxes, as well.

Cuts are far better for economic competitiveness than are increased taxes.

Posted by jaham | Report as abusive
 

“…the euro crisis was…caused by…flabby and uncompetitive [economies]. Welfare states were too generous, labour had excessive privileges, civil services were bloated, swathes of industry were riddled with uncompetitive practices, judicial systems were sometimes dysfunctional, while tax evasion and corruption were often rife. What’s more…there has been an unhealthy nexus between banks and politics.” How true!

To me, the problems of the U.S. economy and the reasons for them are identical. Also, like the euro zone, until these “…problems…are more fully dealt with [a] return to sustained growth; [and lower] unemployment, especially among the young”…is unlikely; and America faces a new crisis over our debt limit in a few months.

The present administration, in deliberately mishandling the rather minimal economics of the sequester. It has clearly decided that meaningful spending cuts are simply not acceptable to their “world view”. That will have huge adverse impact on their very credibility and ability to negotiate with the “loyal opposition” in good faith.

Compromise is least possible when the perspective of one’s “opposite number” is viewed as fundamentally illegitimate. At the root of the problem is perhaps the slowly emerging realization that what “America wants and deserves” is, for the very first time, more than it can actually and sustainably afford and/or deliver. Interesting times ahead, and little “progress”, I’m afraid.

Posted by OneOfTheSheep | Report as abusive
 

The Euro zone and Great Britian have shown us that austerity is not the answer. There would be no supposed “debt limit crisis” if congress would responsibly pay the bills they have already approved. Congress passed the sequester and they hold the bag for they failed to come up with a better plan. The intent of sequester legislation was to force congress to make a more responsible deal. Congress failed again. Dixon is on point because our Congress so blatantly serves wall street first and foremost, not so different than the situation in Europe. Deficit talks must include revenues, not individual income taxes but revenues from a healthy economy. Responsible spending cuts can be positive, but the private sector spends in India, China and Brazil. Who but the government will provide bridge the gap to get our economy moving. Congress insists on continuing to feed the military industrial cons while we hold the bag. Multinationals dominate our political dialouge and inaction while we are left holding the bag.

You would choose austerity, spending cuts and government stalemate solely for the benefit of wall street.

Posted by ebones101 | Report as abusive
 

The GOP has started beating the drum on tax reform. The discussion should begin and end with corporate tax reform. We will never hear the word corporation in their discussion, for they are only people after all?

Posted by ebones101 | Report as abusive
 

what a pity there is no mention in the article of UK failed policies, starting with the debasement of the currency whch has led to no increase in export. And then, the austerity which has left the defict in percent of the GDP higher than Greece, the looming triple dip, the Bank of England not only unable to control inflation but just to predict it. Do we need to add the banks still nationalised, the LIBOR scandal or HSBC laundering of drug dealers’ money ? Still today the only bank run in Europe was Northern Rock’s, the worst riots were the ones in London in Aug 2011. Now finally the rating agencies have started downgrading the UK, the only country in Europe facing the threat of disintegration next year by the Sottish referendum. Wake up Mr Dixon: the sickest country in Europe is closer to you !!!

Posted by phoen2011 | Report as abusive
 

Austerity is really a criminal act to dupe governments to accept a debt they cannot afford and put the payments for that debt on their citizen.

This is a combination of corporate welfare for financial institutions and indentured citizens.

It is completely insane that governments willing do this. There is not other answer than collusion with a few government officials to sell this criminal behavior.

Too big to fail is a lie. Country financials can and should fail for the sake of their citizens. Wipe the debt clean on these over-extended loans.

Why should citizens pay for decades for a greedy financial institution that over extended their risk by loaning money to a country that was essentially bankrupt.

Why – because they cannot fail – austerity will bail them out for decades. What a corrupt and evil society we have become by linking financial institutions worldwide with talons deep into government decision making.

Posted by Butch_from_PA | Report as abusive
 

Government, itself, produces nothing of value. It does not produce a item to sell or a service that can merit payment. It is, rather, a group of people who define themselves as the the promoters of self destruction through dependency. It is a never ending organization whose original purposes have been lost and one who constantly searches for new sources of funding. That funding is money that the ordinary person could use to create something of value rather than only dependency.

Posted by elsewhere | Report as abusive
 

@ebones101,

“The Euro zone and Great Britian (sic) have shown us that austerity is not the answer.” No, they have shown us that Socialism eventually runs out of other people’s money.

“There would be no supposed “debt limit crisis” if congress would responsibly pay the bills they have already approved.” Wrong again.

If Congress would or could limited it’s largesse to currently available revenue they COULD “responsibly pay their bills. Congress instead continues to irresponsibly “approve” expenditures they absolutely know they cannot presently pay.

So they write a bad check like an irresponsible teenager and yell loudly: “It’s gonna bounce unless you mom or dad make it good.” Surprise! America repeatedly bangs up against any unindexed “debt limit”.

It’s like that frustrated person that naively exclaims to their spouse: “I can’t be out of money, I still have checks!” At some point we have to take control of that checkbook or let them go to jail.

“The private sector spends in India, China and Brazil…” because that’s where their dollars buy the most of certain things. They buy coffee the world over because the average American’s dollars don’t go as far purchasing Kona or “fair trade” coffee.

We can’t all afford Starbucks or Whole foods products daily. They buy fresh flowers, fruits and vegetables from Mexico, Central and South America for both price and seasonal variety. They buy clothing from all over.

Isn’t it better to get these things from third world countries for American dollars than to just support them with foreign aid? I remember when China just made guns and bullets and used them to murder Americans in Korea. Is not today’s “arrangement” distinctly better?

“Who but the government will provide bridge the gap to get our economy moving?” The attention of government is forever navel-gazing, an ever-growing, ever more expensive burden on taxpayers absolutely unaccountable to any individual for any specific “responsibility”.

It is a collective junkie that lives only for it’s next “fix” of taxpayer money, and there will NEVER be enough to keep it from feeling withdrawal pains. It thinks the sequester is a terminal illness, when it is only terminal to the congressional “way of life” of spend, spend, spend.

If your stove is empty and you need heat, the answer is not for a politician to fill it with hot air. You must put wood in it and light it.

Private enterprise is dry wood that heats quickly and efficiently. The government is wet wood that may well put out what slight self-sustaining combustion is taking place. Be careful what you wish for.

Government is like catsup. You either get none or wayyyy too much!

Posted by OneOfTheSheep | Report as abusive
 

@elsewhere,

Well said!

Posted by OneOfTheSheep | Report as abusive
 

@Butch_from_PA ,

I have seldom see so many illogical self-contradictions in one post.

“Austerity is really a criminal act to dupe governments to accept a debt they cannot afford and put the payments for that debt on their citizen.” Well, since “austerity: is a course of economic action adopted by certain governments, who is the “criminal” when they dupe themselves?

And where did that “debt” come from? Lavish unsustainable entitlements to “their citizens”. I can hear it now…”Oh, you SHOULD’NT have!” (response) “I know, but I LIKE giving you things”. Inevitable result? Bills in excess of income. The “citizens” here are NOT “innocents”.

It’s like those wonderful things shady businesses used to send us unsolicited in the mail. If we kept them, we owed the money, so it was cheapest to refuse without opening. Same with taxpayers. “We, the people” must learn to say NO!

“Wipe the debt clean on these over-extended loans. Why should citizens pay for decades for a greedy financial institution that over extended their risk by loaning money to a country that was essentially bankrupt.”

Most of us put what money we earn in a bank and then pay our bills through that bank by means of a paper or electronic means of payment. The bank loans out what WE put in, sometimes “to a country that was essentially bankrupt” without asking our advice.

Banks HAVE to “put money out” at interest because our “country” has long followed a policy of steadily debasing our currency. If a bank doesn’t get enough more back in interest to pay it’s expenses and people, it fails.

If enough banks fail, there is not enough in the FDIC to cover OUR losses, and so OUR government must print more money (with NOTHING behind it) to save US. Can you see the end to this, or need I “spell it out”?

What a corrupt and evil society we have become by accepting a level of benefits our respective economies cannot sustain. Even those governments presently “sustained” by liquidating their natural resources will someday face the very same “day of reckoning”.

Posted by OneOfTheSheep | Report as abusive
 

Mr. Elsewhere, can you define why there might be “government”? And if, as you say, it has no reason to exist, do you use anything that government has sponsored, or paid for, or subsidizes? My guess is you use roads and bridges and maybe airports, or rivers. My guess is you get electric power from a grid and you use the internet.

Methinks you know not of what you speak. Less government, where reasonable, would be appreciated by everyone. But government, contrary to your view, does serve a purpose and it does product something: civilization.

As to austerity and this authors perspective, I would agree that every country wants to be more efficient. What he is suggesting that it is all government flab, when we (USA) have first hand experience over the last 40 years, from Reagan to today, of the effects of “trickle down” (posited by lower taxation on the wealthy and corporations for the purpose of “creating” jobs and opportunity) and “job creators” (that pocket the cash and don’t create jobs) to Wall Street raping and pillaging the middle class, etc., to know that all he is suggesting is another way to say: don’t tax the wealthy, don’t tax corporations and minimize the efforts of government to improve the nation.

I think the Koch brothers probably pay him. It sounds like a variation on their mantra; or maybe he is channeling Grover. Whatever it is, he needs to keep in mind that the Bush tax cuts while spending trillions in Iraq along with TRIPLING the defense budget created this mess (along with his gutting the economy). So please, to quote and paraphrase the old country western song: take you austerity and shove it. The middle class can’t afford it.

Posted by jswain23 | Report as abusive
 

Elsewhere you’re a nutter. Government at all levels produces a plethora of goods and services. Just as an example, it funds your police force, streetlights, water systems and health care for veterans. I could list items until the sun comes up. That it does so many times but not always, by purchasing commodities necessary to produce said good or service is exactly what any company or household does as well. Your opinion that it produces nothing of value – “worth payment” – simply exposes your Bircher attitudes.

The founding fathers set up an army, the postal service and the legislative bodies themselves. The other branches of government, elections, etc. etc. But I guess for you that funding would somehow be better spent by citizens who could create substitutes for all of the above.

Posted by Mac29 | Report as abusive
 

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