Gain not pain: the end of austerity politics?

Europe’s voters have delivered their verdict: and they want anything but austerity. In Greece, it is a “message of overthrow”, according to left-wing leader Alex Tsipras, the man charged with today’s impossible task of forming a governing coalition – a coalition which rejects what he described as the “barbaric” terms of the European bailout deal which was agreed to save Greece from fiscal collapse.

Whether he succeeds or not, in France, the victorious Francois Hollande has told cheering crowds that “austerity is no longer the only option… in all the capitals, there are people who, thanks to us, are hoping, are looking to us, and want to finish with austerity”.

Austerity is no longer the only option. Francois Hollande

In Holland, in Italy, and in the UK, millions have siezed their chance at the ballot box to send a message to centre-right governments: this policy of harsh spending cuts is too painful. But what is the alternative, given the precarious nature of economies like Greece and Italy, their spiralling debt burden, their inextricable links to a wider European fiscal discipline?

Down as well as up

Nobel Prize winning economist Paul Krugman has long argued that a strategy of austerity is intrinsically self-defeating. With a new book, End This Depression Now!, he argues that back in 2010 “the world’s policy elite – the bankers and financial officials who define conventional wisdom, decided to throw out the textbooks and the lessons of history, and declare that down is up”.

The momentum of economic logic demanded that austerity should wait. Paul Krugman

In other words, they called for spending cuts and tax increases, despite soaring unemployment and faltering growth. Instead, he argues, “the momentum of economic logic demanded that austerity should wait.” Indeed, by rejecting this doctrine, today’s voters across Europe have proved themselves “wiser than the Continent’s best and brightest”.

America’s former labour secretary, Robert Reich, says it is not a simple choice between cutting and deficit rediction on one hand, public spending and growth on the other. It is a question of timing, he says. Cutting too soon, when growth is already slowing down, makes the debt situation far worse. “You end up with the worst of both worlds – a growing ration of debt to the gross domestic product, coupled with high unemployment and a public that’s furious about losing safety nets when they’re most needed”.

The reason? Public spending, the chief target of austerity cuts, is a key component of demand: so reducing demand, he says, will slow down the economy still further, increasing the size of the debt relative to the overall economy.

Growth first?

For liberal politicians outside the euro crisis zone, the answer is straightforward: growth. Ed Balls, on the BBC this weekend, pushed home his message that austerity is self defeating “Even the head of the European Central Bank is saying you now need a growth plan in the Eurozone,” he said.

While across the Atlantic, Jesse Jackson insisted that the healthier growth and unemployment figures in the United States were thanks to the billions of dollars in stimulus spending. “Enforcing brutal measures on citizens to pay for the mess caused by banks doesn’t just increase poverty and unemployment, it shortens political careers.”

For those who might fear the unknown alternative to a strict deficit-reduction stragtegy, the man most likely to become Francois Hollande’s next finance minister, Michel Sapin, has already sounded a note of caution. “Nobody expects that we simply arrive in power and hand out money”, he said.

And hence the comparison ought not to be with some reckless policy of spend-and-be-damned, but with what the Obama administration calls its “balanced” approach, mixing neccessary budgetary restraint with an overarching commitment to fairness.

Obama’s balancing act

It is a message that president Obama will be pressing home to European leaders when he hosts the G8 summit at Camp David later this month. And a message that candidate Obama will no doubt be hoping is far more palatable to voters than the one so roundly rejected at ballot boxes across Europe this weekend.
Growth, jobs, fairness – and all without risking the complete collapse of the Euro. No wonder it is a vote-winner.

Yet in the harsh world of such volatile markets and the kind of deep rooted economic troubles that countries like Greece have been grappling with for decades, this is clearly no 1968, when workers rallied to the barricades to declare “La lutte continue!” – the struggle continues.

A tough moment, in this of all years, to promote a “message of overthrow”, in a continent that longs for calm and stability.