Mon, Jun 03, 2013 - Page 9 News List

Eurozone retreats to ‘austerity lite’

Recession, social unrest and political necessity have forced a shift in the eurozone, with questions about the effectiveness of austerity measures

By Larry Elliott  /  The Guardian, LONDON

Illustration: Yusha

The subway workers were on strike in Lisbon on Thursday. This month it will be the turn of the teachers. Portugal’s blue-collar trade unions are gearing up to bring almost a million workers out later in the summer as the country’s protest against austerity intensifies.

It is a similar story across large parts of the eurozone. There have been mass protests in Madrid, Dublin and Athens against policies designed to reduce budget deficits and bring about economic reform. Now, after six successive quarters of recession, it seems the protesters have something to cheer about. Austerity in the eurozone is in retreat.

The European Commission has told six countries — France, Spain, Portugal, Poland, the Netherlands and Slovenia — that they will have up to two extra years to put their public finances in order. In truth, Brussels had little choice, because weak growth had reduced tax revenues and made it impossible for exacting budget targets to be met.

What is more, the commission found that it was one thing to dictate terms to the small countries on the periphery of the eurozone, but quite another to lay down the law to France, where French President Francois Hollande’s loss of popularity in his first year in office surpasses that of any previous president.

Economists say the case for austerity was undermined just over a month ago, when it was revealed that basic research errors in an influential paper by two Harvard economists — Carmen Reinhart and Ken Rogoff — invalidated the claim that countries suffered a growth hit when public debt rose above 90 percent of national income.

“Many politicians in favor of austerity have quoted their work in recent years to justify their positions,” ING Investment Management head of strategy Valentijn van Nieuwenhuijzen said.

“With that support now almost eliminated and the fairytale of expansionary austerity [on the back of magically improved confidence] being completely contradicted by the facts on the ground over the last three years, the ability of those remaining austerians to ‘sell’ their story to the public has been seriously damaged,” he said.

Jonathan Portes, director of the UK’s National Institute for Economic and Social Research, said: “The continued depression in parts of the eurozone means that people think austerity on its own is a doomed strategy.”

That is certainly the view of the IMF, which has produced research showing that the impact of austerity is greater when countries have limited scope to offset the impact of tighter fiscal policy by cutting interest rates and when a large number of countries are cutting back at the same time.

Both those conditions currently apply, which explains why the IMF — spurred on by US President Barack Obama’s regime, which is deeply troubled by the depression in the eurozone — has been advising member governments to ease up. Its belief that Britain is one of the countries guilty of austerity overkill explains why the Washington-based organization advised British Chancellor of the Exchequer George Osborne to counter this year’s planned £10 billion (US$15.2 billion) fiscal tightening with higher infrastructure spending and tax cuts for business.

However, compared with the eurozone, Britain has been a model of flexibility. The chancellor has pushed back the date when the UK’s debt-to-GDP ratio will peak by two years and he has allowed the economy’s automatic stabilizers to work. Unlike some fellow European finance ministers, Osborne has not sought extra cuts to make good the drop in tax revenues caused by the weakness of growth and he announced measures in the budget to support the housing market.

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