Beyond austerity?


FOR THE first time in this newly globalised world no government now seems willing, or indeed able, to provide strong leadership just when those qualities are most needed. In the United States, political paralysis in Congress ahead of the presidential election in November has left the country unwilling to address its deficit and public debt problems before then. Although a global superpower, America finds itself unable to provide economic leadership at home, or to offer much inspiration or financial assistance to economies in difficulty elsewhere.

Meanwhile in Europe, Germany has slowly and reluctantly accepted the leadership role thrust on it as the euro zone crisis has unfolded. However, elections in Greece and France last weekend, where voters registered their protest against austerity measures, may well mark a turning point. It may produce a long overdue change of emphasis – from a narrow preoccupation with fiscal rectitude, to a greater concern with ensuring economic growth in Europe.

The electoral outcome in both countries, allied to evidence in these and other European economies – where growth is contracting and unemployment is rising – suggest that rapid deficit reduction is proving counterproductive. Economic recession has deepened in the EU, as an over-reliance on fiscal discipline has depressed economic activity. Under agreements to be enshrined in the fiscal treaty, countries that must reduce their deficits have cut spending and raised taxes, thereby depressing demand and growth. The challenge facing European leaders is how best to balance austerity and growth. How to have a fiscal compact and a growth compact that are complementary, not contradictory.

France’s president-elect, François Hollande, has come to power with a mandate for such an approach, both in France and in the EU. His proposals for France involve higher spending and higher taxes. His ideas for a European growth strategy are sounder. These include increased lending by the European Investment Bank, better use of EU structural funds, the introduction of a financial transaction tax, and the issuance of project bonds for infrastructure investment; most of which German chancellor, Angela Merkel could, probably, accept. She has insisted that austerity and growth are two sides of the same coin.

Mr Hollande’s election will be welcomed by the European Commission, which has long advocated an economic strategy for the euro zone that stresses growth as well as fiscal rectitude. Italy’s prime minister Mario Monti also regards the current focus on austerity as excessively narrow and even the European Central Bank, by far the most fiscally hawkish of the European institutions, has also signalled a change of emphasis towards promoting economic growth. Dr Merkel has ruled out renegotiating the fiscal treaty, already agreed by 25 of the 27 EU members. That said, Mr Hollande has made clear that he supports the fiscal rules written into the treaty and his proposed growth pact need not involve a renegotiation of the treaty text but could be attached as an annex to that document.