Austerity is a moral issue
In the nearly five years since the worst financial crash since the Great Depression, the remedy for the worldâ€™s economic doldrums has swung from full-on Keynesianism to unforgiving austerity and back.
The initial Keynesian response halted the collapse in economic activity. But it was soon met by borrowersâ€™ remorse in the shape of paying down debt and raising taxes without delay. In the last year, full-throttle austerity has fallen out of favor with those charged with monitoring the world economy.
Christine Lagarde, managing director of the International Monetary Fund, has been urging German Chancellor Angela Merkel, who has been imposing singeing public spending cuts on her neighbors, and George Osborne, Britainâ€™s finance minister, who has been doing the same to the Brits, to ease up. The IMF is now urging fiscal measures beyond monetary easing â€śto nurture a sustainable recovery and restore the resilience of the global economy.â€ť
Earlier this month, Lagarde criticized Americaâ€™s automatic sequester cuts for being too deep, too soon. The United States, she said, â€śshould consolidate less in the short term, but give â€¦ economic actors the certainty that there will be fiscal consolidation going forward.â€ť
So much for the economics of austerity. That is only half the story, however. Austerity is a moral issue, too. It inflicts enormous misery upon hundreds of millions. To an American living under a relatively generous economic regime that is providing annual growth at 2.5 percent, the scale of unemployment in Europe is alarming.
We think 7.5 percent is too high. In Greece, it has reached 27 percent and youth unemployment (age 15 to 24) is at an appalling 64 percent. Much the same is happening in Spain, with 27.2 percent unemployed and youth unemployment hitting 57 percent. Italyâ€™s 11 percent unemployed figure disguises the fact that more than that number have given up looking for jobs â€‘ so the real jobless tally is more than 20 percent.
The social cost of austerity can be found in widespread political unrest, including mass public demonstrations that often spill into violence. Hard times are encouraging the adoption of simple-minded political solutions, and Europe has seen an upsurge in the electoral success of undemocratic and racist extreme parties that scapegoat minorities. Traditional parties take turns taking the blame, with voters turfing out incumbents of both right and left to punish them for complicity in inflicting such general misery.
The prospect of no work is diminishing and socially corrosive. Depression is rife. Cuts to health budgets have led to a sharp rise in HIV cases. New research from Stanford and Oxford Universities suggests austerity is deeply damaging to individuals and sharply increases the number of suicides.
While mainstream politicians revel in their impotence, religious leaders are speaking out with unprecedented vigor. It takes a lot before senior churchmen dare to intervene in politics, for fear they will offend half their followers. But the extent of the despair being endured has changed the equation.
The Roman Catholic primate of Spain, Braulio Rodriguez, archbishop of Toledo, predicts that austerity will lead to despotism. â€śWe have to change direction,â€ť he said this week, â€śotherwise this is going to bring down whole political systems. We have to give people some hope or this is going to foment conflict and mutual hatred.â€ť
Archbishop Ieronymos, head of the Greek Orthodox Church, has written to the Greek premier to warn against administering â€ślarger doses of a medicine that is proving deadly.â€ť â€śGreeksâ€™ unprecedented patience is running out,â€ť he said, â€śfear is giving way to rage, and the danger of a social explosion cannot be ignored.â€ť
In London, where the ruling coalitionâ€™s austerity program has led the nation twice back into recession, the leader of the Anglican church, the archbishop of Canterbury, argues that â€śwhat we are in at the moment is not a recession but essentially some kind of depression. It therefore takes something very, very major to get us out of it, in the same way as it took something very major to get us into it.â€ť
When spiritual leaders warn that austerity may lead to the end of democracy, itâ€™s time for political leaders to take notice.
There is little sign that Europeâ€™s political leaders, in particular Germanyâ€™s unwavering Merkel, grasp the seriousness of their dilemma. Yet austerity is undermining the very cause they claim to be rescuing by their tough love: closer European unity. Nor is it rescuing the euro, the troubled single European currency designed to bind European nations in an ever-closer embrace.
The latest economic data shows the 27-nation European Union to be in recession for the sixth consecutive quarter. The euro bloc of 17 nations has also been in recession for six quarters. Far from bolstering the value of the euro, austerity policies are causing it to slide against the dollar. Yet the EU insists there is no alternative: Austerity is the only cure, even if it kills the patient.
Germany, with Europeâ€™s strongest economy, has almost alone among EU nations benefited from the acceptance of the euro, which, particularly in its weak state, keeps the prices of exports unnaturally cheap. But German prosperity comes at an enormous cost. Anti-German sentiment in Europe is rife â€‘ particularly among the Mediterranean nations, which are reviving memories of atrocities committed during German occupation in World War Two.
Seventy years after German troops massacred 498 men in cold blood in the Greek village of Kalavryta, in reprisal at the killing of German soldiers by Greek partisans, the Greek government is citing such incidents to prove Germany owes $213 billion in unpaid World War Two reparations. A quarter of a million Greeks died during German occupation, most from starvation. Germany agreed to reparations when the war ended in 1945, but stopped payments within a year.
In 1970, the Germans settled for a once-and-for-all payment of $70 million. The sum the Greeks are now demanding would go a long way to solving the countryâ€™s debt problem. The angry response from Merkelâ€™s government to the new Greek demands aggravates the newly opened wounds between the two countries and revives the sense, now commonly expressed by non-German Europeans, that the financial crisis has let Germany own by stealth what the Nazis failed to win by conquest.
Europeâ€™s economic turmoil is dragging the world economy down. It is against this destructive display of unnecessary and counterproductive masochism that many here continue to demand that the U.S. sequester be allowed to continue slashing at public spending. On top of this, Tea Party insurgents in the Republican Party prevent the vacillating party leadership from leading.
Few doubt that the level of national debt is unsustainable and must eventually be paid down, but timing is everything. A glance across the Atlantic offers a chilling insight into what would happen here if the fiscal hawks get their way and start imposing European-style austerity.
It wonâ€™t be pretty.
Nicholas Wapshott is the author ofÂ â€śKeynes Hayek: The Clash That Defined Modern Economics.â€ťRead extractsÂ here.
PHOTO (Insert A): International Monetary Fund (IMF) Managing Director Christine Lagarde speaks during the conference with top financial officials at the Economy ministry in Paris November 30, 2012. REUTERS/Charles Platiau
PHOTO (Insert B): Irena, 50, a Polish homeless worker, lies on a park bench in central Athens January 15, 2012. REUTERS/Yannis Behrakis
Â PHOTO (Insert C): German Chancellor Angela Merkel (L) meets with IMF chief Christine Lagarde before a European Union debt crisis summit in Brussels October 26, 2011. REUTERS/Pool/Bundesregierung