Tuesday 8 May 2012

The Beginning of the End for Austerity?

The election results in France and Greece give rise to hope that at long last the tide may be about to turn in the Eurozone.  There is most certainly a pressing need for the Eurozone countries to get out of the neo-liberal austerity driven mess they are in.  Paul Krugman and Martin Wolf have both recently published interesting articles demonstrating that austerity does not and is not working.  Krugman’s article is here and Wolf’s article is here.  Martin Wolf’s research shows conclusively that: “In all, there is no evidence that large fiscal contractions bring benefits to confidence and growth that offset the direct effects of the contractions.  They bring exactly what one would expect: small contractions bring recessions and big contractions bring depressions.”  Would the Messrs Cameron, Clegg and Osborne take note.
The great worry, loudly and constantly repeated is that the markets and in particular the bond markets will punish countries that do not stick to austerity measures.  Yet there is no evidence that the bond markets reward austerity.  Ireland has ruthlessly pursued a massive fiscal contraction over the past few years with no benefits in terms of access to the bond markets.  Spain is now in a similar situation.  The new very right wing government has embarked on a similarly ruthless policy of fiscal contraction and its reward?  The bond markets have reduced Spain’s credit rating even further.
It is not hard to see why, with all these austerity measures where is the growth in the Spanish economy going to come from?  And without growth how can Spain repay its existing loans?  It is a downward spiral which benefits no-one.  Even the markets are telling everyone that austerity is not the answer.  Or at least that austerity on its own is certainly not the answer.
This is where the election of François Hollande as the new French President could be crucial.  Along with the Greek voters comprehensively rejecting the pro austerity parties in their general election.  These two countries are not alone.  In the Netherlands the coalition government collapsed after a right wing party rejected further austerity measures.  A general election will now be held later this year.  And the two Mario’s have added their voices to the call for measures to stimulate growth.  I refer to Mario Monti the technocrat Prime Minister of Italy and Mario Draghi the President of the ECB.  Even the European Commission is beginning to stir as Olli Rehn the Economics Commissioner has added his voice to the demands for a rethink on austerity.   Rehn is calling for a European Investment Pact to boost growth in the Eurozone.  
What is interesting about these new voices calling for a programme for growth is that that they are coming from all sides of the political spectrum.  It is not just the socialist Hollande who is demanding a rethink, but centrist and even right wing politicians.  Even the ultra right wing Mariano Rajoy in Spain must be desperate for some change in policy given the disastrous state of the Spanish economy and the way it is being punished by the markets.
We must not allow ourselves to get carried away by all this.  As the title of this post suggests we may be at the beginning of a move away from neo-liberal rigidity, but there is a long way to go.  As expected Angela Merkel has already announced that there is to be no back tracking on the fiscal pact.  However the forces aligning up against her and her ilk are getting stronger and stronger and as I mentioned earlier, it cannot be dismissed as coming from the usual suspects on the left.  No one expects the Eurozone to suddenly change gear completely.  Austerity measures will remain, but their force may be reduced somewhat and the timescale may be revised.  The most we can hope for in the immediate future is that some concrete measures are put in place to stimulate real growth throughout the Eurozone.  The battle is only beginning but at long last credible voices are emerging to challenge the dead end doctrine of neo-liberalism.

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