Austerity: the buzz
The eurocrisis is going strong, in a bad sense, and much of the debate about what should be done is defined by whether you think austerity is good or bad.
Austerity is being condemned by all sorts of economic theorists like Paul Krugman. And it is now politically on the ascendant thanks to Francois Hollande’s electoral victory in France and Angela Merkel’s local poll defeats. And then there’s Greece where all Hellas has broken out over the issue of austerity.
The anti-austerity argument is crudely that the budget cuts being demanded are so severe that they are driving European economies into recession, making revenues fall, forcing more budget cuts and thus more recession. Race to the bottom, etc. Ultimately, neither side is talking that much sense.
The heart of the eurocrisis was a balance of payments problem between the eurozone’s northern and southern halves. The north was capital rich and that flooded the south which then let it fuel a lot of housing bubbles and excessively large bureaucracies. Then it all went belly-up leaving lots of debt.
If these had been countries with independent monetary policies – and thus different currencies – they would have devalued their currencies. Whatever else, the threat of contagion would have been limited.
If they had been part of a really united Europe, one with political union and so on, there would have been welfare transfers, labour movement and whatnot by the central government. It would hardly have been a balance of payments problem given that it was one politico-economic entity.
But the Eurozone was this halfway house that had to find its own chimera-like solution.
So the north tried to provide money to the south. But to sell it to its taxpayers it insisted on “austerity” by the south. Reduce your debts, and we’ll extend you credit.
The Greek elections effectively were a repudation of that original north-south contract – a funds transfer with strings attached. The problem now is that as this unravels there is no obvious alternative. Closer political union is not possible in this polarized environment. So the other option is going back to independent currencies. Which is what the market is starting to assume will happen.
Austerity was the buzzword of a jerry-built solution to address the fact the Eurozone was an edifice that was left half-done by its political leadership. And it seems to have failed.