Austerity appears to be an increasingly dirty word in Europe. The past week alone has seen European Commission President José Manuel Barroso, Bill Gross of Pimco and Italy’s new prime minister Enrico Letta calling for an easing of austerity.
Spain’s surpassing of the 6m unemployed mark on Thursday added fuel to the debate. But even in Germany, the austerity police of the eurozone, cracks are beginning to show ahead of the elections with the emergence of an anti-euro party.
a) Are there any austerians left? Yes. Here are some of them.
- UK: Chancellor George Osborne hit back at criticism over his apparent excessive austerity by claiming there is no other alternative. And after a tough week when he was criticised by the IMF over the excessive pace of his austerity programme, this week has brought better fortunes for his stance as figures showed a lower deficit and the economy expanded 0.3 per cent in the first quarter.
- Germany: Chancellor Angela Merkel’s view as articulated this week couldn’t be clearer: “I call it balancing the budget. Everyone else is using this term austerity. That makes it sound like something truly evil.” Germany is the only eurozone country with a 2012 budget surplus.
- US: The situation here is different because of sequestration, which triggered automatic spending cuts and tax rises. And the White House faces a July deadline to raise the borrowing limit or default on its debt.
- Latvia: The tiny Baltic state is emerging from a state of uber austerity – part of its bid to join the euro later this year – and it could end up being seen as a poster child for successful deficit cutting implementation, with real growth of more than 5 per cent in 2011 and 2012, despite the broader recession in Europe.
- Spain: The push by Europe’s fourth-largest economy to cut spending and raise taxes has led to record unemployment topping 6m for the first time in its recent history. The government of Mariano Rajoy announced economic reforms and structural measures on Friday.
- Italy: The technocrat government of Mario Monti has been steadfast in carrying out fiscal consolidation. All eyes will be on Mr Letta, who has already said: “Europe’s policy of austerity is no longer sufficient”.
b) Why the calls for softening austerity measures?
- In spite of the massive spending cuts introduced across Europe, debt levels have still risen as the painful consolidation has hurt growth and reduced tax revenues.
- The focus on austerity, while introducing structural reforms and rebuilding the banking sectors, has come at the expense of investment and growth, thrusting unemployment to record levels, particularly for the youth, damaging consumer spending and increasing poverty.
- The electorate are getting tired of years of austerity and Italy’s recent elections are one example of voters venting anger (along with their growing frustration at the political class and system).
c) What might ‘less austerity’ look like?
It’s not entirely clear. The debate is not premised on a crude “you’re either with me or against me” argument. It is much more nuanced than that. Bar Japan, there is no evidence of a shift to fiscal stimulus and therefore any new-look austerity will likely be extensions to deadlines for consolidation rather than a massive shift to public spending and letting structural reform slip. As such, Spain on Friday won tacit approval from Brussels to extend by two years its plan to bring its budget deficit within the EU’s 3 per cent limit.
Already, Brussels has accepted that economies from the Netherlands to Italy will miss their EU-mandated 3 per cent budget deficit targets for this year and some probably next as well. Christine Lagarde, managing director of the IMF, last week said that Spain didn’t need the “upfront, heavy-duty” fiscal consolidation initially planned.
c) What are the benefits of less austerity?
Less short-term pain for politicians and the electorate, and more time to focus on growth-led policies and the implementation of structural reforms before focusing on debt.
d) What are the dangers?
Losing credibility as politicians prolong the agony of reducing debt, leading to markets losing their patience and resulting in a bond crisis.
e) How are markets reacting to the prospect of less austerity?
Somewhat ironically, markets appear to be rather sanguine amid the growing calls for less austerity. Eurozone benchmark yields have been declining and yields of Spanish debt, for example, are at their lowest level in more than a year.