Rethinking austerity in Europe

The Greek crisis can be debated without demonising the other side.
Juan Meseguer | Jul 10 2015 | comment  




Beyond austerity debate.  European Parliament / Flickr

 

The crisis in Greece, forced to choose between jumping through the hoops demanded by Brussels or taking a path that could hasten his exit from the Eurozone, is fuelling criticism of austerity policies. In the background of this controversy churns the old debate about what makes an economy grow in crisis. But it's hard to advance this argument without demonizing one of the two sides.

(Updated 07/08/2015)

Few issues unite both left and right these days like European criticism of the troika of the European Commission, the International Monetary Fund (IMF) and the European Central Bank (ECB). In the UK, for example, supporters of UKIP, the Eurosceptic Tories, Labour and the Greens waited impatiently for the outcome of the referendum on Sunday in Greece, in which 61.3% of voters said "no" to the offer of the Eurogroup.

Guardian columnist Rafael Behr, reviewing the arguments of one or other side on the reasons that make the troika the bad guy, concludes: "Each side agrees that capitalism lies at the heart of Europe’s problems, but the left thinks there is too  much of it and the right says not enough." Either by lack of market regulations or their excessive presence, depending on which side you are on, the common ground is that "democracy is in danger because of a conspiracy of opaque institutions based in Brussels."

A moral fable about the Greek crisis

But Behr will not convince the critics whose only focus is the troika. From the outset, he says, "Greece was not qualified to join the single currency. Its entry was a political fraud, the scale of which was revealed by the financial crisis." And he believes that “Alexis Tsipras’s promise to the Greek people of euro membership without austerity was dishonest.”

He also crosses off the list of “evil” countries those that have swallowed the "bitter medicine" of reform, such as Ireland and Latvia, and now think that the demands for special treatment for Greece threaten to destabilize their economies. “This is not to say those views are fair, or have more weight than Greek suffering, only that a morality tale of wicked, bullying Europe and heroic Athenian resistance doesn’t illuminate what is going on.”

The Greek crisis cannot be an excuse to mount a narrative representing Europe as "a single actor driven by malicious intent". Rather, it should be seen as the result of decisions taken by "a variety of actors, mostly with decent motives, who have failed to manage conflicting demands under very specific circumstances."

Certainly, says Behr, this episode serves to provide important lessons, but they do not invalidate the European project. Among other things, it is not clear that the end of Brussels "will bring more democracy and better capitalism". Although the EU is often portrayed as "the high temple of austerity", the fact is that it is also the place where “democratically elected heads of government can organise with combined authority to moderate international capitalism.” 

Conspiracy against Syriza?

Maliciously attributing "austerity" intentions, in a derogatory sense, to known supporters of fiscal responsibility is a way of impoverishing the debate on the economic and social consequences of austerity.

Thus the director of the Institute of Ideas, Claire Fox, who has evolved from Marxism to a libertarian position, says: "It's easy to declare oneself anti-austerity and pro-growth, but when the moment of truth arrives, decisions not are as simple as choosing between black and white, " she explained to El Mundo in 2013.

An example of the narrative criticised by Behr and Fox is the discourse that identifies confronting the powerful financial elites with defence of the people, as does Syriza, flagship of the anti-austerity revolt in Europe.

"The social devastation borne by the poor has been maintained thanks to a simple doctrine: 'There is no alternative [to austerity]'. If Greece threatens this narrative, it must be punished, " wrote Owen Jones recently in the New Statesman. Jones, considered the enfant terrible of the British left,continued: "Europe’s great powers – the European Union, the eurozone’s unaccountable Central Bank, the IMF, the German government – have all conspired to make an example out of the party."

Greece has already received two bailouts

But Jones’ conspiracy theory contrasts with the vision of those who know the ground, as is the case of journalist Maria Ramirez, former correspondent of El Mundo  in Brussels for six years and co-founder of El Espanol: "It is clear to me that the hesitations of the leaders of European governments and EU institutions contributed to increasing the problems that the weaker economies brought from home. But in the case of Greece, I am also convinced that the EU has made a genuine effort to help the antiquated and failed Greek economy," she writes in her El Espanol  blog.

Besides seeking political dialogue, "the EU and the IMF have disbursed more than 260,000 million euros in two bailouts between May 2010 and August 2014, according to figures from the European Commission." But "the government has been clumsy and Tsipras has managed to alienate potential allies such as Italy, France and Spain at a time when budgetary rigidity had shown its dangers."

Krugman’s failed predictions

The Greek crisis has given prominence to the question of John Maynard Keynes (1883-1946) about what gives rise to an economy in crisis. Recently this has been addressed by Amartya Sen, a professor at Harvard University and winner of the Nobel Prize in Economics in 1998, in response to historian Niall Ferguson, also a professor at Harvard and a researcher at the Hoover Institution.

Three days after David Cameron was returned to power with an absolute majority in the UK general election, Ferguson defended an article published in The Financial Times suggesting that the Tories had won, thanks to the success of the austerity measures adopted during the crisis by Finance Minister George Osborne: "In England, the Conservatives won because Mr. Osborne was right and his critics in error," he pontificated.

Among the critics in question was the Keynesian Paul Krugman, also a Nobel laureate in economics, who predicted in 2012 that cuts the Tories made would leave the British economy limping for many years.

But Krugman's predictions have not been fulfilled. Ferguson recalls that the British economy grew by 2.6% in 2014, more than any other country in the G-7; it has created over 1.9 million jobs since May 2010 and the unemployment rate has dropped to 5.6%; average weekly earnings increased by 8% between 2010 and 2014 ... The coalition between Conservatives and Liberal Democrats has also succeeded in reducing the budget deficit inherited from Labour: 10% of GDP in 2009 down to 5.7% in 2014 .

Growth without austerity

To this Amartya Sen responded saying that, if austerity has worked for the UK, this is far from true for the rest of Europe. "Even if we reduce public debt quickly, austerity is not particularly effective (...). To achieve this, we need economic growth. And austerity, as Keynes said, is essentially anti-growth ".

Sen mentions several periods in recent history where there has been growth without austerity: from the mid-40s to mid-60s of the twentieth century, the debt / GDP ratio in the United Kingdom was high, but that did not prevent the country growing economically while developing the welfare state; Bill Clinton began to govern with an enormous deficit in 1993 and, eight years later, he left the US presidency no deficit; and the acclaimed reduction of the budget deficit in Sweden between 1994 and 1998 occurred in a period of rapid growth.

Sen’s main proposal is that the Greek economy should be allowed to grow along Keynesian lines: increase public spending for a while, as a measure to create jobs and stimulate demand.

But critics of Tsipras insist that Greece should focus on reforms such as reducing the huge public sector so as to regain employment in the private sector. It seems appropriate to add: if you spend more money. The alternative is to defer payment of debt and reduce interest to enable the Greek economy to breathe.

The articles by Ferguson and Sen show the same reasonable disagreement that has faced many economists since the publication of Keynes’ General Theory of Employment, Interest and Money in 1936. It will not be easy to reconcile them. At the same time it will be good if everyone can continue to air their view without ascribing evil intentions to the others.

Juan Meseguer writes for Aceprensa, a Spanish online journal. This article has been translated and reprinted from Aceprensa with permission. 



Copyright © Juan Meseguer . Published by MercatorNet.com. You may download and print extracts from this article for your own personal and non-commercial use only. Contact us if you wish to discuss republication.

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