Comment: Austerity is painful but Europe has no choice

VOTERS in Europe have called time on the austerity programme and urged their new governments to flick the switch to growth. If only it were as simple as that.

Yes, we need a greater focus on economic expansion but the two are not mutually exclusive. Governments that fail to tackle the deficit will simply store up problems for the future.

Europe was plunged into crisis because of the borrowings that ballooned during the decadent decade. For it to return to any sort of boom, it must first kick its addiction to debt. The medicine now being forced on a sick patient tastes foul, but it’s a vital potion if the continent is to be restored to health and the euro is to survive.

But the French and Greek electorates, intoxicated by those years of plenty, want an immediate end to the starvation diet. They are telling the politicians to ease back on deficit reduction and inject more stimulus. Greed is back on the agenda. We want more, and we want it now!

Unfortunately, policymakers have already pumped billions of euros into a number of economies through quantitative easing and subsidies with limited impact. The European Central Bank, under its new president, Mario Draghi, at least recognised that it had to reverse interest rate rises designed to combat a phantom inflation problem.

But how much more can be done to stir growth? The stronger nations – and that should include France – may find it through a more-targeted approach to non-eurozone markets.

Here there are lessons for the Franco-German relationship. While the former has plunged into a costly social model, the latter has continued to build its industrial base. The markets nervously await new French president Francois Hollande’s plans and whether they will involve a potentially dangerous tax-and-spend or borrow-and-spend campaign that could force up domestic interest rates.

Meanwhile, German industrial orders shot up in March, with foreign demand coming almost exclusively from non- eurozone countries, highlighting Germany’s resilience to the debt crisis but also its increased reliance on markets outside the bloc. Quite simply, instead of trying to sell BMWs and Siemens kitchen appliances to their struggling neighbours, they are exporting them to cash-rich Brazilian and Chinese customers.

But not all countries – including Britain and France – have an industrial engine to equal that of Germany and the weaker (mainly Med) nations will continue to be in the service of the stronger ones. Greece, and sooner or later Spain, will need to address their debts whether they like it or not.

After months of painful negotiations to reach an agreement on bailing out Greece, the last thing the eurozone needs is for that deal to be torn up, even if president Hollande is seen by the Greeks as an anti-austerity ally who may push for a renegotiation of the package.

The Greeks describe the austerity programme as a barbaric and failed project that is causing misery and will lead to more social unrest.

But the Greeks have only got themselves to blame as a result of a lax approach to tax collection, the manual workers who’ve enjoyed executive-style pay packets, a public sector wage bill that has doubled in a decade and a system riddled with perks and fiddles, early retirement deals and tax evasion. The Greeks have got to learn to live within their means and that means accepting the support on offer and swallowing the medicine. Or go bust.

Wonga’s an option, but beware of the costs

IN ORDER to break the stranglehold of the banks, the UK government has been keen to encourage alternative sources of lending into the market.

It has been supportive of business angels, private equity and invoice-factoring companies. But payday loan firms are probably not what ministers had in mind.

For those who already have access to a range of credit facilities but who need a quick loan, the latest move by Wonga.com into the business market may prove just the ticket. After all, £10,000 in your account in 15 minutes may just settle a bill or two while awaiting an invoice to be paid.

On the other hand, clients need to be careful of the cost. These firms have been criticised for the huge interest rates they charge and for preying on the vulnerable which, in this case, could include struggling small firms.

A short-term loan with a high interest rate may be the price some businesses have to pay for the shortfall in lending from the banks. But anyone opting for a loan of this sort should do so with their eyes fully open.

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