Austerity — the British test case

April 25, 2013

First quarter UK GDP figures will show whether Britain has succumbed to an unprecedented “triple dip” recession. Economically, the difference between 0.2 percent growth or contraction doesn’t amount to much, and the first GDP reading is nearly always revised at a later date. But politically it’s huge.

Finance minister George Osborne has already suffered the ignominy of downgrades by two ratings agencies – something he once vowed would not happen on his watch. And even more uncomfortably, he is looking increasingly isolated as the flag bearer for austerity. The IMF is urging a change of tack (and will deliver its annual report on the UK soon) and even euro zone policymakers are starting to talk that talk. It was very much the consensus at last week’s G20 meeting.

The government can argue that it hasn’t actually cut that hard – successive deficit targets have been missed – and that it does have pro-growth measures such as for the housing market and bank lending. But the inescapable political fact is that Osborne and his boss, David Cameron, have spent three years arguing that they would cut their way back to growth and that to borrow your way out of a debt crisis is madness. In fact, it’s arguably perfectly economically sane, given that if you get growth going, tax revenues rise and will eat away at the national debt pile.

Either way, elections are now only two years away and the government will have to galvanise an economy that has essentially flatlined for much of its tenure within the next year or so to reap any dividend with the voters.

It’s unclear quite where the austerity debate is in the euro zone. European Commission president Barroso says it has reached its limits, but the change of tack will probably extend no further than the granting of Spain, France and others another year (two at the outside) to meet their deficit targets. That decision is expected next month. The word is that others are unhappy with the bluntness of Barroso’s intervention.

Olli Rehn, the European economy commissioner who will preside over the decision to relax debt targets, is testifying to a European parliamentary committee and Italy’s prime ministerial nominee, Enrico Letta, has wasted no time wading into the debate, declaring that austerity is no longer sufficient. He begins consultations with parties on the form of a new government this morning with the aim to get it sorted by the time markets open next Monday.

Germany is giving the austerity vs growth debate short shrift. Finance Minister Wolfgang Schaeuble is out again this morning saying no one is against growth but that debt-cutting must continue. However, even the mighty German economy is faltering at the moment. The economy ministry will produce updated forecasts today. As things stand it is forecasting anaemic 0.4 percent growth this year. A very minor upgrade is expected. Even Schaeuble says there is flexibility within the EU’s debt rules that can be utilized and Angela Merkel’s SPD opponents are advocating some loosening up, which could bring political pressure to bear as elections approach.

Spain will announce a raft of new reforms on Friday, focusing on steps to boost such as credit and tax breaks for small companies, and return to unfinished reforms of the energy sector and pension system. Few analysts believe it will do the trick and to make the point, today we get unemployment figures which could show the total breaching six million for the first time.

French jobless figures are set to show a record of around 3.2 million are out of work. The euro zone cannot afford its second largest economy to falter, with the impact that will have on French political clout. Maybe it is that more than anything else that is driving the debate.


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