No, austerity did not work
There have been a lot of sighs of relief in Europe lately, where countries like Britain and Spain, long in recession, have finally started to grow. Not by much, nor for long. But such is the political imperative to suggest that all the misery of fiscally tight economic policies was worth the pain that there are tentative claims the worst is now over and, ipso facto, austerity worked.
Hold on a minute. Growth is good. Growth is what allows countries to pay down their national debt by increasing economic activity, putting the unemployed to work and making people prosperous enough to pay taxes. But gross domestic product growth alone is not enough to provide adequate sustained prosperity if it does not also lead to significant job growth.
Take Spain, which has just emerged from two years of recession by posting a third quarter growth rate of 0.1 percent. Technically the Spanish slump is over. But a glance at their job figures shows the country has a long way to go before it can genuinely say it has escaped the diminishing effects of austerity — in the form of tight fiscal policies, public spending cuts and labor and entitlement reforms — imposed indirectly by Germany through the European Union.
In Spain, unemployment remains stubbornly high at 26 percent; half of those age 25 and under are still without jobs. More than half those age 25 and under in Greece and Croatia are also unemployed. In Europe, only in Germany and Austria is youth unemployment under 10 percent. Greece and Spain lead the sorry list of European countries with more than 25 percent unemployed, and 13 more are enduring joblessness at more than 10 percent.
In Spain, where economic growth is occurring only in the export sector, there is little suggestion the economy has been genuinely fixed by this protracted austerity regime. As one analyst put it, “Domestic demand is still contracting and against that backdrop it’s hard to see a strong and sustained recovery.”
Feeble growth is not enough to create jobs and the labor regulation reforms that have accompanied austerity mean growth now has to be at somewhere between 1 and 1.5 percent before new jobs are created. To spur on job growth, labor-intensive industries like construction need to expand. Yet there is little sign of that happening.
In Britain, where the Conservative government imposed austerity measures ostensibly to ward off a sovereign debt crisis and a run on the pound — while shrinking the state sector, in accord with its neo-Thatcherite beliefs — they are popping champagne to celebrate achieving a quarterly growth rate of 0.8 percent. As late as this spring, Britain expected to fall back into recession again — a triple-dip it appears to have narrowly avoided.
But Britain’s annual growth rate of 1.5 percent has been achieved because strict austerity has been surreptitiously loosened. In a change of policy by the new bold governor of the Bank of England, Mark Carney, interest rates are being kept artificially low until unemployment falls below 7 percent.
The lackluster recovery is also being fueled by a sly government mortgage subsidy to help first-time home buyers, and encourage house builders. Yet this courts the sort of artificial boom in home prices that brought the world economy to its knees in 2008.
Overall, after five years of austerity, the euro zone, driven by Germany’s fierce adherence to fiscal continence that it has inflicted on the rest of the European Union, still leaves 11 countries in negative growth, including Italy, Portugal, Netherlands, Spain and Ireland. The only nations who enjoy more than 2 percent growth are special-case small countries: Latvia (which has the advantage of being outside the euro), Lithuania, Malta and Luxembourg. Even Germany, the traditional powerhouse of European growth and the champion of worldwide austerity, can only muster growth of 0.5 percent per annum this year.
The claims that austerity has worked seem extravagant in light of the hard figures. Some politicians facing elections are talking up signs of life in their national economies to boost business confidence — in the belief that the wish is the father of the deed.
There is a sense, too, that it is impossible for European consumers to hold their breath for so long without respite. Patience is running out with an economic experiment that, so far, has failed to provide a sound remedy. Even if an economy is persistently punished, it comes up for air eventually.
In Europe, however, five years of austerity show little signs of reward for all the punishment inflicted. Back in the aftermath of the 2008 crash, it was widely suggested that two things were likely: there would be an L-shaped recovery; and that partial recovery would be jobless. There was talk of “a new normal” where national economies would revert to an earlier, lower size and resume growth in a different and shallower trajectory.
Surely, it was thought in the spring of 2009, the world’s leaders wouldn’t be so foolhardy as to institutionalize low growth and high unemployment by applying deflationary policies as if we were suffering not from a collapse in business confidence but from too fast growth and rising prices. Yet what appeared then as unnecessary pessimism appears now to be prescient wisdom.
The figures again bear out that gloomy prognostication. The European Commission says the euro zone as a whole will decline by 0.4 percent this year, year on year, though they predict 1.1 percent next year. Output in the euro zone, however, is still about 3 percent lower than in 2008.
According to the International Monetary Fund, Britain’s economy will grow 1.4 percent this year and 1.9 the next — though it is still 2.5 percent smaller than it was in early 2008. The British employers’ organization, the Confederation of British Industry, is even more bullish. It is saying Britain’s economy will soar to 2.4 percent growth next year.
But even if the modest European recovery is sustained, it remains fickle, capable of being blown off course by temporary setbacks such as an American federal government shutdown. As the U.S. Treasury has pointed out, even the slender European recovery has taken place on the back of America’s by comparison expansive — not to say it is expansive — economic policies.
Germany’s postwar economic model has always been export-led. In the last five years Berlin has defended the very existence of the euro because it allows German exports to be priced comparatively cheaply, far cheaper than if they had continued to use the deutsche mark — which reflected the true strength of the German economy.
Added to this, in the last five years Germany has browbeaten its European partners into adopting austerity rather than allowing them to borrow and grow their way out of the Great Recession. Only Britain, outside the euro, has largely evaded Germany’s beggar-thy-neighbor policies.
It is impossible to predict the outcome of a road not taken. So it is unknown whether, if the Europeans had not reneged on the deal struck after the 2008 crash at the hurriedly convened Washington G20 summit to ensure “the action of one country does not come at the expense of others or the stability of the system as a whole,” we would now be in a more prosperous world with millions more in work.
It does, however, seem likely.
It is not hard, however, to deduce where we would be now if America had not elected Barack Obama and instead had President John McCain, and later President Mitt Romney. These Republicans — goaded by their Tea Party friends — might have imposed harsh austerity measures on America to pay down the national debt more quickly and sharply reduce the size of government.
We would still be in a deep, perhaps deepening recession. And instead of the glimmer of light the Europeans now see on the horizon, they, too, would be struggling in a slump not seen since 85 years ago — when President Herbert Hoover blithely looked on as the world economy suddenly slid into a 10-year slump.
Nicholas Wapshott is the author of Ronald Reagan and Margaret Thatcher: A Political Marriage, and Keynes Hayek: The Clash That Defined Modern Economics. Read extracts here.
PHOTO (TOP): People enter a government-run employment office in Madrid, October 24, 2013. REUTERS/Sergio Perez
PHOTO (INSERT): Italian policemen attempt to stop Alcoa workers as they protest against their dismissals from employment in front of the Ministry of Employment building in Rome, September 10, 2012. REUTERS/Tony Gentile