Friday, May 11, 2012

Austerity backlash is a lesson

“Europe is watching us, austerity can no longer be the only option.” So says France’s new President, Monsieur Francois Hollande, who came to office amid a backdrop of a deep divide over how to respond to the recession. While conservative economists have been successful in pushing many countries to austerity measures there has been a backlash across Europe as the impact of such measures has accelerated the hardship on the most vulnerable, and the once vibrant middle class. We can learn from this.

Within the past few weeks we have seen the collapse of the Dutch government over coalition partners rejecting more austerity measures; the austerity measures imposed on Greece by international lenders was soundly rejected by Greeks in general elections, which left a polarised state and a fight over who will form the government; and in the United Kingdom Prime Minister Cameron’s Conservative/Liberal Democratic coalition saw significant defeats in the 5,000 seats up for grabs in midterm local elections after Labour campaigned successfully against government spending cuts. There is a clear trend in Europe against measures that impose such harsh measures on people who, really, bear almost no responsibility for the financial crisis besetting their countries.

Chancellor Angela Merkel is looking increasingly isolated as Germany insists that the austerity policies it largely designed remains the key to getting Europe out of the recession. In a move that must clearly have raised more than a few eyebrows, Ms Merkel went so far as to publicly endorse France’s Sarkozy in an ill-fated effort to shore up support for her austerity-minded colleague in the remaining days before Sunday’s election. But Germany’s motivation for retention of austerity measures throughout the Eurozone is not merely ideological: it holds a very large chunk of Eurozone debt and wants guarantees that debt will be repaid. 

The election results in France, Greece, the UK, and the coalition collapse in Holland, convey a very simple and important message from the people: governments need to put its citizens first. In almost every instance, bailouts have been given to large corporations — “too big to fail” — or to payback lenders, sophisticated institutional investors and banks, who well understood the sovereign risk they were taking. The people in turn have had to confront job losses, reduced pensions, later retirement ages, reduced government services and higher taxes. A formula for precisely the voters’ revolt we have seen.

Liberal economists and leaders such as Hollande, the UK’s Ed Miliband and US President Obama favour policies that assist economic growth because it creates jobs and puts more money into the economy. By limiting cuts in government spending you ease the burden on the weakest sectors of society while encouraging growth. A country which has more than 50 percent of its young people unemployed — Spain — is a country heading for a deep crisis; Spain is an example of the dire problems associated with austerity measures. 

As governments respond to the challenges brought about by the global recession there is a clear need for sober reflection on the best pathway forward. Austerity measures seem not to work anywhere and when implemented always have a detrimental effect on people, generally, while benefiting the privileged few. There is a loud voice coming out of Europe clamouring for the leaders to listen to the people and respond to their concerns. Those leaders refusing to do both will no doubt endure the same fate as Mr Sarkozy.

1 comment:

  1. Response to this column in a Bermuda context: