Europe Reaches the Limits of Austerity

On Sunday, the strategy of austerity to solve the European debt crisis hit a wall.

The first round of the French presidential election and the collapse of the Dutch government showed that voters are running out of patience with government policies to control public debt through spending cuts or tax increases.

That’s especially true when economic growth is slowing or declining, as several European countries slip into recession again. With virtually no growth, the price of austerity rises and the pain becomes unbearable. Voters react with the only power they have: throwing the rascals out.

French President Nicolas Sarkozy was the first incumbent ever to finish second in the first round of the presidential election. The winner, by a narrow margin, was Socialist François Hollande, who favors rolling back some of the reforms Sarkozy instituted. He’s also rhetorically more skeptical of austerity than Sarkozy is.

But the far right of Marine LePen’s National Front and the Left Front of Jean-Luc Mélenchon together garnered 30% of the vote, a large minority. Both left and right reject austerity imposed by Brussels or Berlin, and it suggests many French voters are souring on the European Union, a project its leaders have championed for decades.

Dutch Prime Minister Mark Rutte. Photo: Flickr Creative Commons/Gerard Stolk.

Another core member of the EU, the Netherlands, suffered a political crisis when the government  headed by Prime Minister Mark Rutte collapsed. New elections will take place in a few months.

The Netherlands is among the most fiscally sound countries in Europe, one of four that still has a AAA rating (along with Germany, Luxembourg and Finland). That rating could be in jeopardy as Rutte was  unable to get support from his coalition partners for a new austerity  program that would cut Dutch government spending to 3% of GDP, from 4.3%.

 

4.3% of GDP? President Obama and the Tea Party would propose champagne toasts to each other if that happened here!

For the last couple of years, the EU has pushed its weaker members—Greece, Portugal, and Ireland—into fiscal austerity programs. Of these, only Ireland has embraced the regimen, and things appear to be improving there.

But Greece nearly had open rebellion from its citizens when its leaders pushed through an EU-imposed restructuring and unofficial default on its debt.

An unelected technocratic government in Italy is having trouble getting unions and other political factions to back much-needed market reforms.

And a conservative Spanish government, which supports austerity, is struggling to meet its budget goals as official unemployment nears 25%.

Germany seems to be the only major country where most voters support austerity for themselves and others. But it’s clearly the exception that proves the rule.

Riots in Athens in February over austerity measures. Photo: Flickr Creative Commons/Thanasis Troboukis.

This is typically what happens in financial crises. As governments bail out overleveraged financial institutions to “save” the financial system, the burden of the additional debt and weak economic growth strain public finances to the breaking point.

It’s the worst of both worlds, and the choices are usually unpalatable, as economists Carmen Reinhart and Kenneth Rogoff have pointed out in their groundbreaking work.

At that point, politicians have three choices: impose “shock doctrine” austerity on the public; tell voters what they don’t want to hear and face electoral defeat, or back off a bit and do a better job of explaining why austerity is needed.

Whatever path they take, it’s going to get tougher as the political pendulum swings away from austerity while the underlying fiscal situation gets worse, not better. In democracies, when the “wisdom” of elites and the will of the people clash, the people win, whether or not they’re right.

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