There is an alternative to austerity
Article from The Economist, reproduced in the Boletín Electronico de CEDE–THE backlash to the backlash against austerity seems now to be underway. For months, if not years, complaints have grown that the euro-zone’s austerity-first approach to the crisis is somewhere between inadequate and counterproductive. That message now seems to be winning converts across Europe. Euro-zone leaders are increasingly acknowledging the need for a growth agenda, and the success of François Hollande in the first round of the French election is being hailed as a decisive blow against austerity. Perhaps predictably, the pushback is on. The Financial Times‘ Gideon Rachman captures the essence of the counterargument in a piece titled "No alternative to austerity". What Mr Rachman manages to do quite effectively is illustrate how muddled the conversation has become. He writes:
Mr Hollande says that he will replace austerity with growth. Why didn’t anybody think of that before? Unfortunately, a vacuous slogan is underpinned by ineffectual proposals. Mr Hollande’s programme stresses small, badly-targeted boosts to public spending, while virtually ignoring the structural reforms that are the only route to sustainable growth…
Spending on infrastructure – “shovel-ready” projects, as President Barack Obama has called them – is, of course, a standard Keynesian solution for an economy that is caught in a downward recessionary spiral. Under normal circumstances, such spending might be a great idea.
In Europe, however, there are plenty of reasons to be sceptical. If building great roads and trains were the route to lasting prosperity, Greece and Spain would be booming…
As for Italy and Spain, they are not cutting their budgets out of some crazed desire to drive their own economies into the ground. Their austerity drives were a reaction to the fact that markets were demanding unsustainably high interest rates to lend to them. There is no reason to believe that the markets are now suddenly prepared to fund wider deficits in southern Europe.
