The theme du jour is that Europe has had enough of austerity, that the cause of Greek woes is austerity and that the entire aspect of economic growth has been overlooked. During the G8 in Washington at the weekend, Angela Merkel was under fire from the so called growth camp what with Germany being the prime example of a country whose economy is underpinned by savings. Poor Angela, it is not enough that her electorate have had enough of financing the indebted countries of southern Europe, world leaders are increasing pressure on her to loosen fiscal measures and to soften her tone. She has even agreed to eurobonds (which in effect would have to be underwritten by Germany). Added to this is the electoral victory of Francois Hollande on the back of his "growth, not austerity" platform. But is it really an alternative?
It would be hard to find a leader who would be against growth. How is it possible not to support something that everyone wants? The problem is that you cannot just have growth by decree. The politicians who most frequently advocate growth are really advocating the injection of public funds into the economy. In particular President Obama seems to still believe that the slowly growing American economy may be momentarily kick started by public spending – in order to win the elections, but what then? Today – a few years into the crisis – it is possible to see how a growth strategy based on public funds and government debt is both useless and hazardous. Moreover, such a strategy is unaffordable. This begs the question: what should a growth oriented policy really look like at a time when most european countries are struggling with a heavy debt burden?
The strategy based on stimulating economic demand by increasing government spending has been around for the last thirty years. However, if things were that simple, most countries would just throw public money at various enterprises and all the countries in the world would be flowing with milk and honey. But public money has to come from somewhere, either from taxes or from debt, i.e. future taxes. If this expenditure supports growth at the point of spending but does not create better conditions for future development, this money is wasted money. And it is difficult to find investment projects in rich countries which ensure growth potential is generated at a time when the investment comes from public funds.
On the other hand, in countries which have lived high on the hog for years while being soothed by politicians uttering impossible promises, the public is little inclined to accept a decline in living standards. And even if they do, as they did in Italy during the first few months of Premier Monti’s term in office, they want to see the results of the reforms almost immediately. Global experience in this area unequivocally demonstrates that the far reaching and swift application of reforms is better than a slow and drawn out system correction. The Italian experience is interesting as during the first months of Monti’s term, the premier was able to achieve an increase in the retirement age without mass protests. It is much harder now for the Italian government to implement further reforms as the honeymoon period is over and the public have decreed that they’ve had enough of reforms against the backdrop of decreasing market pressure. In the face of Greek chaos, markets can again speed up crucial reforms both in Italy and in other countries of southern Europe. Spain is an example of what happens when reforms are delayed, where the irresponsible application of crucial system changes, in particular the sidelining of the in depth restructuring of the banks has led to a situation where today Spain has joined Portugal in being a candidate for possible debt restructuring.
The cause of the problems of southern Europe, in particular those of Greece, is not the overly harsh reforms but their opposite – a sloppy and inefficient application of said reforms. In Greece in particular shock therapy was and still is the answer. If they do not apply this, then the markets will do it for them.
Without EU financing, they will have to introduce a new currency side by side with the euro and this will be devalued right out of the gate which will lead to the country’s drastic impoverishment. Such an alternative is much worse than focussed austerity measures.