AUSTERITY measures are only exacerbating the problems of the eurozone, but what are the economic alternatives, asks Peter Geoghegan
Praça da Liberdade, in the centre of Porto, is one of those picturesque plazas that continental Europe seems to excel at. There’s a spacious main square with imposing statues of long-dead Portuguese monarchs and beaux-arts facades that hide hotels, banks and offices.
Last week, I sat drinking coffee beneath a parasol on a terrace on Praça da Liberdade. It was a warm afternoon and the avenue was busy, mainly with tourists struggling with maps of Portugal’s hilly second city. Across the street, a middle-aged man in smart shoes and a shirt was rooting around in a rubbish bin. He appeared to have lost something. After about 30 seconds, he found what he wanted: a half-eaten sandwich.
Around the same time that I was watching people scavenging for food in Porto – over three days I counted more than half-a-dozen hunched over the city’s bins – European leaders were celebrating “green shoots” of recovery in the eurozone. New figures show that, in June, unemployment fell for the first time since April 2011 (by just 24,000); in Ireland, house prices have increased slightly; the continent’s manufacturing and service sectors are enjoying their strongest activity since January of last year. But on the streets of Portugal – and elsewhere in the eurozone’s “periphery” – there are few signs of recovery. The reason is simple: there is none.
Portugal is expected to endure a third straight year of contraction in 2013. The situation is even worse in Greece, where the economy shrank by an eye-watering 7.2 per cent in 2011 and is not expected to return to growth any time soon. In Ireland, living standards continue to fall, especially for the hundreds of thousands drowning in a sea of mortgage debt. Across the eurozone, unemployment still stands at an enormous 12.1 per cent.
Europe is diverging, not converging, the longer the crisis lasts and the deeper austerity cuts lacerate the body politic. None of this should be surprising; indeed this divergence is built into the very fabric of the euro itself.
When the euro was introduced, France was the only country with a current account surplus. Germany and France swapped places in 2005 and Germany has remained in the ascendancy ever since, the only country not running deficits. This wasn’t anything to do with profligate southern governments and Teutonic puritanism – it was a necessary product of a currency union between very different economies all of who could not (by definition) be in credit to one another, and among which Germany had a strong comparative advantage.
If there really are green shoots in the eurozone garden, almost all are in the German patch: in 2011, the Germany economy grew by 3 per cent. Statistically, for every vacancy in Germany, there are two people applying. In Ireland, the equivalent figure is 31. In Spain and Portugal, it’s 71 and 89, respectively, according to fourth-quarter 2012 figures released by Eurostat.
German Ordoliberalism has become the economic dogma of the continent, and particularly in the eurozone. Which is great, as economist Mark Blyth points out in his excellent Austerity: the History of a Dangerous Idea, “so long as you are the late-developing, high savings, high-technology, and export-driven economy in question”.
For the peripheral PIIGS (Portugal, Italy, Ireland, Greece and Spain), it’s awful and – worse – pointless. No matter how much Greece drives down wages and cuts back government services by introducing wave after wave of austerity, its manufacturing exports will never be able to compete with German-made products.
Just as Prime Minister David Cameron and Chancellor George Osborne have made great, fallacious play of Labour “maxing out the credit card”, since the crisis broke in 2008 chancellor Angela Merkel and the German leadership have portrayed the eurozone’s problem as one of irresponsible, spend-happy governments. It’s not an analysis backed by facts.
When the crisis hit, Portugal’s net debt was less than 70 per cent of gross domestic product. Now it is well over 100 per cent – and growing. In Ireland, net debt was 12 per cent of GDP in 2007, this year it is expected to top 117 per cent. The reason debt is rising has little to do with government spending – it is the cost of rescuing negligently over-leveraged banks. The bill for bailing out the banks (private debt) has been settled with public funds, unleashing a wave of sovereign debt that we are still struggling to contain.
The European Union (and Britain’s) solution has been austerity. Across Europe, governments have slashed budgets, cutting services, often those used by the most vulnerable. The social cost of this has been routinely ignored, but as the queues at food banks across the UK attest, it’s not just in the PIIGS that people are suffering.
Economically, austerity is self-defeating: if we all reduce spending at the same time, we all grow poorer. What it has done is consolidate wealth in the hands of the already rich: in the United States, the top 7 per cent saw their average net worth increase by 28 per cent between 2009 and 2011. For the remaining 93 per cent, it dropped by 4 per cent.
Ironically, austerity has been tried before – and it has failed before. After the First World War, austerity was the policy of choice on both sides of the Atlantic, a process accelerated after the Wall Street Crash of 1929. The eventual result was war. (In Germany, the Nazis were the anti-austerity in the interwar years, pledging to take the country off the gold standard and to actively increase employment. They did this – by building a war economy.)
Why then, 80 years later, when the global financial system went into meltdown, did world leaders turn again to austerity? The answer, as Blyth shows, is that in narrow (but influential) circles, particularly in the US, the core ideas of austerity, inspired by right-wing Austrian economists – a minimal role for the state, cutting government spending, relaxing labour laws – never went out of fashion. And in one European state a version of austerity was being practiced for decades: Germany.
But as the eurozone economies continue to diverge – and the difference in borrowing costs between the northern core and the southern periphery grow – the European project itself will come under increasing pressure.
Without the possibility of devaluation, countries such as Greece, Spain and Portugal will be forced to make more and more painful cuts, which will increase inequality and social ferment but will do little to return economies to growth. Such a situation cannot go on indefinitely.
Closer to home, the coalition in Westminster has shown little inclination to turn to Plan B. Recent economic good news – the UK economy expanded by 0.6 per cent in the three months to June – will be taken as proof that the austerity medicine is working. In reality, this anaemic growth is little more than an increase in debt-fuelled consumption, and the national economy remains at sub-2008 levels.
So, if austerity makes most of us poorer and only prolongs recessions, what is the alternative? Blyth, who was born and raised in Dundee and is now a professor of political economy at Brown university, wisely counsels against pain-free solutions. His proposals – higher taxes and “financial repression”, such as capping interest rates on government debt – would certainly pose political and logistical challenges. But, as mounting evidence shows, austerity isn’t working, either abroad or at home.