Charlemagne
After austerity, what?
The backlash against Europe’s austerity is intensifying
May 4th 2013 | From the print edition
LIKE France’s François Hollande a year ago, Italy’s
Enrico Letta rushed to Berlin immediately after taking
power, and with a similar message: Italy would
respect fiscal discipline, but Europe must do more to
promote growth. “If Europe stands only for negative
news, for austerity, then we’ll see more of these
movements against Europe,” he told Angela Merkel.
Italy’s new prime minister did not explain how he would pay for expensive promises to cut taxes and
expand welfare. Nor did he spell out exactly what he wanted Europe to do. What is clear is that the
backlash against austerity has become intense: even Ireland’s president, Michael Higgins, has joined
in. The big danger is that, in the clamour for relief from self-destructive policies, countries will give
up on the painful structural reforms they need.
For all the hopeful signs of “rebalancing” within the euro zone, the economies of southern Europe
are still shrinking. Europe’s single market belies its name when smaller firms in southern Europe
must pay far higher interest for loans than German competitors, if they can get credit at all (see
article (http://www.economist.com/news/finance-and-economics/21577060-european-centralbank-has-lost-control-interest-rates-spain-and) ). Forecasts by the European Commission, due this
week, will be gloomy. On the eve of Labour Day, Eurostat reported that unemployment in the euro
zone had risen to 12.1%. In Greece and Spain, three out of five people under 25 are now jobless.
Austerity has also suffered a double academic blow. IMF economists admitted that the recessionary
impact of austerity was more severe than they thought. Then economists at the University of
Massachusetts, Amherst, found mistakes and questioned the data and assumptions in a piece of
research by Kenneth Rogoff and Carmen Reinhart suggesting that a country’s growth slows down
markedly once its public debt rises above 90% of GDP. José Manuel Barroso, president of the
European Commission, made a half-admission of defeat when he said austerity was reaching its
limits. “A policy, to be successful, not only has to be properly designed; it has to have the minimum
of political and social support.” Or as Mr Letta put it more pithily to the Italian parliament, “budget
consolidation alone will kill Italy.”
What might replace the current policy is less clear. The obvious trade-off is to go more slowly on
deficit-cutting and faster on structural reforms, especially when political capital is limited. The IMF
pushed for such a mix from the outset. It would be especially sensible for such countries as Italy and
Portugal, which stopped growing long before the euro crisis: in effect, they are suffering the bust
without ever having enjoyed the boom.
Yet austerity is not about to end. For countries in bail-out programmes, less of it means asking
creditors for bigger loans (or a debt write-off). And nobody seriously suggests fiscal stimulus: the
only question is how far deficit-cutting should be slowed. The commission (with Germany’s nod) has
become readier to allow countries to delay meeting fiscal targets in the face of recession. The
Netherlands should get another year, Spain another two. Even Mr Letta says he still wants to bring
Italy’s deficit below 3% of GDP this year. That would release Italy from the EU’s “excessive deficit
procedure” and, to an extent, from German tutelage.
France will be a test-case. It is likely to get another year to meet its target, in exchange for a promise
of more structural reforms. In June EU leaders will discuss the idea of countries signing binding
“contracts” for reform, perhaps backed by the offer of more money. Yet shifting the focus may be
harder than it looks. “Structural reform” is a broad term. Each country needs a different mix.
Enacting legislation is not the same as implementing it. Reforms tend to increase short-term pain,
while the benefits do not come through immediately.
The OECD, a rich-world think-tank, argues that troubled euro-zone countries have made the most
progress in enacting reform. Even so, several have a lot more to do to make labour and product
markets more flexible, to boost productivity and to create efficient public administration. Structural
reforms are hard to measure. But one fact is telling: unit-labour costs in southern Europe are falling,
yet even in the region’s worst post-war slump inflation has mostly been higher than in Germany.
This amounts to a double assault on citizens: they have not only lost jobs and benefits, but are
seeing higher prices.
Governments have found it easier to cut deficits than take on obstreperous unions and vested
business interests. Take Greece: it has cut deficits more than anyone else, but only this week, in the
sixth year of recession, did it pass a law to allow incompetent civil servants to be fired more easily.
Or look at Italy: its technocratic prime minister, Mario Monti, forced through more austerity, but his
plan to simplify the sacking of workers was watered down. One underlying problem is dysfunctional
politics: countries that got into trouble because they could not reform in the good times are still
struggling in bad ones.
The north must reform too
Keynes’s dictum that the time for austerity is during a boom, not a bust, also applies to structural
reform. But crisis is often needed to force change. The case for relaxing austerity should not hide the
need for big reform. And reform should not be limited to the euro-zone periphery. Germany can do
more, even without a spending spree. Just liberalising Sunday shopping could boost domestic
demand. Across Europe, deepening the single market, particularly in services, would help kindle
growth.
Fixing the euro zone’s banks so they can resume lending also requires Germany to stop blocking the
creation of a full banking union. And this means being ready to share the risks of other countries’
banks. Without this, Germany faces an even bigger risk: that the euro zone collapses because
political resentment pulls it apart. Rules alone will kill Europe.
Economist.com/blogs/charlemagne (http://www.economist.com/blogs/charlemagne)
From the print edition: Europe