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A REVOLT against austerity. A shift to growth. A new policy for the Eurozone. The supposed new approach, symbolised by yesterday’s European Commission economic recommendations for each Eurozone country, has been called many things. But once the rhetoric is stripped away, any changes that remain are largely semantic. The Eurozone remains on the same policy path; at most, it is just progressing along it at a more leisurely pace.
Let me quickly recap yesterday’s recommendations. Spain, France and the Netherlands were all given more time to meet their deficit targets, albeit in exchange for more open-ended commitments to deep structural reform. Don’t forget that this is far from a new precedent; Greece, Portugal and Spain have all received numerous extensions over the past few years.
Meanwhile, Italy exited the proverbial EU economic dog house known as the “Excessive Deficit Procedure”, a move which in normal times would allow it more economic freedom. Unfortunately, these remain far from normal times, and few doubt that those in charge of the purse strings in stronger Eurozone economies will continue to scrutinise every Italian policy move as if it were their own. Countries like Belgium and Slovenia got some leeway, but were also on the receiving end of a textbook scalding for a lack of structural and financial market reform – the type of which most Commission officials could probably dole out from memory by now.
For all the fanfare over the past months and weeks, this “new path” seems very much par for the course. Yes, there is a tweak here and there, but much in the same way a football manager might bring on a defender when his team is getting thrashed – it’s more about saving face than making a sizeable impact on the course of the game.
The first question to ask is, despite this not being the wholesale change it was cracked up to be, will it have any impact on the crisis?
In a word: unlikely. It’s clear that the current policy approach is not working, and in many cases a slowdown in the pace of cuts will be helpful – at least in political and social terms – as it allows a slower pace of wage and jobs cuts. That said, the amount of additional fiscal spending to be allocated to boosting the real economy remains a pittance in comparison to collapsing domestic demand and falling investment in many of the struggling countries. Further, it’s worth noting that, although some spending cuts have been slowed, the flip side of this will be deeper and faster structural reform. In many cases this falls heavily on the labour market. Unfortunately the short-term impact of such reforms, no matter how necessary, is often increased unemployment.
The second and more interesting question is, what more could actually be done on this front?
This brings us, inevitably, to the broader question of austerity versus growth. This has become a key debate during the crisis, but it fails to capture the key question in the Eurozone. It is clear to everyone that Greece, Portugal and Ireland were insolvent, and it was market pressure that pushed them into bailouts. Reducing debt levels is a vital part of their reform, while also serving to counter the significant moral hazard that comes with a bailout. Similar constraints apply in Spain, Italy, Cyprus and Slovenia in terms of expanding spending in the short run.
Therefore, asking to end austerity in much of the Eurozone is akin to asking for greater transfers from the stronger countries – whether direct, through fiscal union, or indirect, through banking union or much higher inflation.
This provides us with a clearer picture of the situation. First, the widely mooted change in Eurozone economic policy actually amounts to little more than a small adjustment, slathered in a thick coating of political rhetoric. Secondly, in reality there was little room for adjustment to this policy. This is mostly because many states have little room for further spending, but also because the decisions lie with national governments and parliaments, not the Commission.
This brings us to the conclusion that, rather than discussing whether or not to change austerity, there should be more focus on solutions that can really solve the crisis. The fundamental choice for the Eurozone remains the same as it always has been: the creation of the necessary architecture to deal with a widespread economic crisis, or face a break-up.