Wednesday, November 14, 2012

The Beginning of the End for Austerity?

No sooner did François Hollande forthrightly embrace austerity as the policy of his administration than hundreds of thousands of people took to the streets in dozens of cities across Europe, primarily in the southern tier but also in Belgium and France. The magnitude of the protests, the violence that broke out around the edges of demonstrations in many countries, and the sheer visibility of the pain that austerity has inflicted suggest that things may not hold together much longer. What is more, the likelihood of a Greek default, not in spite of but because of austerity, which has actually decreased Greek GDP and increased debt, only exacerbates the situation. Is a disorderly end to the euro in store. Once again, the possibility seems real, as does the prospect of major political upheaval.


Mitch Guthman said...

I share your apprehension but I think it’s more likely that we will see a replay of the lead-up to the Iraq War. The leaders felt that everything would be fine if they could just get the war started. I think there’s a similar sense of things about austerity. You can show them all the charts about economic declines, drops in GDP, economies worse off than ever and declining tax revenues. The leadership of Europe does not care. These people are totally committed to staying the course.

The leaders and elites seem to genuinely (despite the evidence) to believe that they are on the right course and that once the governments in the periphery (which now appears to include Italy, Spain and France) have agreed to austerity then there might be a brief period of unrest which must be suppressed but soon everything will quiet down. The people in those countries will come to accept their reduced standards of living and a bleaker future as normal. They think this is the beginning of austerity not the beginning of austerity's end.

As Andrew Mellon said, eventually the depression will run its course. The workers, the businesses and all the land will be liquidated. The people will learn to work harder and lead more moral lives, their expectations will be properly diminished and the right people will have stepped in to buy everything up. Then will come the recovery and everything will be better than before.

I don’t see this ending without a lot more violence. I see the old ghosts we thought had been put to rest being revived. I hate to sound excessively dramatic but Hollande was probably Europe last best hope to hold things together and he just punted. This will probably not end well.

Anonymous said...

The bankers need to be made to pay for the outrageous economic war they have launched against the rest of us. Off topic: Interesting questions about "the crisis" raised in this new book:
La Crise sans fin - Myriam Revault d'Allonnes | Seuil

Anonymous said...

These are the harvests that socialism reaps after government sows the seeds of socialism over years and years. The protesters might just as well protest and demonstrate. They don't have anything else to do. When a country builds and encourages a culture of taking, eventually the takers outnumber the producers and the decline starts. In an economic downturn the decline becomes more pronounced and evident. The decline was always there, but obscured by temporary prosperity. I would have thought the majority of U.S. voters would have seen all this in Europe and voted rationally on November 6. They did not.

DavidinParis said...

I can only say the following: read Krugman.

Mitch Guthman said...

@ Anonymous,

I think you are mistaken about the causes of Europe’s difficult situation. The social welfare state did not cause the Financial Crisis of 2008 (which was mainly caused by wild speculating by bankers). Spain’s disastrous situation wasn’t caused by profligacy but, again, by wild and uncontrolled gambling in the private sector.

Ireland was considered a paragon of fiscal responsibility. Here, too, the crash wasn’t because of overspending on social services but because wild property speculation by banks. The state bail out of the banks is what caused the enormous overhand of debt which Ireland faces. None of Ireland massive debt was incurred to provide social services for the people. As was the case with Spain and England, every farthing of this massive debt came from bailing out the private sector, chiefly the bankers.

Worse still, the very “socialism” you decry as economically unsustainable was the very thing which initially cushioned the shock of the Financial Crisis of 2008. There was every indication that Europe would emerge from the crisis sooner and with stronger economic growth than the United States. Yet today we find that the overall eurozone economy has shrunk for the second quarter in a row.

The austerity measures imposed upon Europe have been entirely self-defeating. Incomes are down. Spending is down. Tax revenues are down. Disaster looms. The confidence fairy has fled the battlefield.

What distinguishes the two situations is that the United States has its own currency and applied economic stimulus instead of austerity. The belief by the European elites in the doctrine of “expansionary austerity” was daylight madness. It was the imposition of austerity in the middle of a recession which created this catastrophe. The social welfare state had nothing to do with it.

Anonymous said...

@Mitch "..massive debt came from bailing out the private sector, chiefly the bankers. " Precisely. The socialisation that has caused the problem was the socialisation of bankers' debts and the privatisation of their profits. And still the shysters have largely not been prosecuted. So in retribution for these "sins of omission and commission" let us demand a global debt jubilee, wipe it all off the books and start afresh.