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Europe: Pain, No Gain

By Dovilas Bukauskas

The approach to Europe’s debt crisis has been, up until now, defined by a sink-or-swim attitude. Germany and France tell debt-afflicted countries they must commit to drastic cuts or watch their economies plunge.

Fortunately, forward-thinking politicians and commentators have begun questioning this forced march toward austerity. French president-elect François Hollande made promises to re-negotiate the fiscal treaty in his platform. Even the European Central Bank’s president, Mario Draghi, who throughout the debate in Europe has sought to downplay or reduce the bank’s role in rebuilding Europe, recently admitted in a Reuters article that, “the case for strengthening banking supervision and resolution at a euro area level has become much clearer.”

The ECB has been sending mixed messages about its actual willingness to bankroll European growth initiatives, like industry and infrastructure investments. But at least European leaders are discussing the idea, and that’s a good thing. The Wall Street Journal reported that “after months of unrelenting fiscal austerity, deemed necessary for the euro zone to emerge from the debt crisis, policy makers are waking up to concerns that governments are driving their economies into a new recession that will undo any improvements thus far in state finances.”

Last year, Nobel Peace Prize-winning economist Joseph Stiglitz told the BBC, “If Europe insists on going forward with the kind of austerity packages in Germany and without the kind of assistance they need to help those countries with severe economic problems, such as Greece, then almost surely the eurozone will break up.”

On a more basic level, prioritizing austerity measures as a response to economic hardship is bad government. Governments do not exist exclusively as engines of economic manipulation—they’re also supposed to be political bodies concerned with the welfare of the people they govern. If the riots breaking out across Europe are any indication, many Europeans feel that the austerity measures being adopted by their debt-mired governments violate this essential mandate. The rioters protest their governments’ economic mismanagement of the crisis as much as they do the fresh injury of new government-imposed hardships.

In these troubled nations, like Greece, Spain, and Italy, the recession’s adverse effects are only compounded by the austerity measures. When a shocking 51 percent of Spain’s youth is unemployed, one cannot expect them to take the news of more austerity cuts lightly. Cuts to social programs like pensions and unemployment insurance are difficult to justify if they are slashed during the moment when the public needs them the most. In Greece, where overall unemployment has hit 21.8 percent, the government is considering cutting even more public sector jobs in order to help pay its debt, and it is slashing the welfare programs that would help cushion the blow for the unemployed segment of the population. Some commentators have wondered if Europe’s era of social security is coming to an end.

In Bloomberg News, Hollande said, “Of course, we won’t depart from rigorous budget rules, but austerity in the sense that it’s only a burden or pressure is unbearable for people.” The New York Times reported that, “the economic downturn that has shaken Europe for the last three years has also swept away the foundations of once-sturdy lives, leading to an alarming spike in suicide rates.”

Austerity is a politically marketable policy in the hands of those advocating it. Taking a “tough stance” on “deadbeats” is an attractive platform. But in many cases, it seems like a counter-productive one. The “bailouts,” on the other hand, can easily be painted as capitulation to greedy and lazy EU nations. But “bailout” does not have to be a dirty word. By tying bailout money to more effective rules that ensure that the money gets to where it needs to go, Europe’s leaders have a powerful tool in their hands with which to further develop economic unity and government transparency across the region.

The eurozone already has a strong precedent of tying advantageous trade reforms to various legislative conditions and industrial regulations. Opponents of eurozone bailouts worry that profligate nations will squander the funds, but if the loans are granted on the condition of total accountability, irresponsible politicians’ hands are tied and critics’ fears can be quelled. If eurozone legislation can be passed that forces member nations to pass certain pieces of legislation, certainly the same can be done with ECB loans and their effective use. Indeed, this is already the mechanism by which austerity is being imposed. The EU needs only to change which strings they decide to attach to the bailout. This can set a stronger precedent for EU economic cooperation and political efficacy, and it can help ensure a return on investment for the European Union. After all, debtors are most profitable when they don’t default.

Growth (and the resulting debt elimination) through investment, obviously, has a very strong precedent. The highly successful post-WWII recovery, catalyzed by the Marshall Plan, is perhaps the best indicator that investment might be the best medicine for Europe. The crises in question, of course, are not commensurate—the Marshall Plan replaced and, in most cases, improved upon the infrastructure of a Europe torn apart by the greatest war that the world has ever known. But even a small measure of the Marshall plan’s huge success would be far greater than the little- to-no-growth forecast for a Europe dotted with defaulting or bankrupt nations plagued by social unrest.

The money is not impossible to come by, and although Germany would be footing a large part of the bill, it wouldn’t be alone. ECB Governing Council Member Klaas Knot told Reuters that a large sum had already been secured by the International Monetary Fund: “The new European emergency fund now has 800 billion euro. The European central banks have 150 billion euro loans to the IMF. Japan has pledged $60 billion; Britain $15 billion; Sweden, Denmark, and Norway together now more than $30 billion; China about $40 to $50 billion. That is all together about $350 billion.” He expects to be able to raise this to as much as $400-$500 billion.

This is not to say that austerity should be avoided. Tightening one’s belt can be a necessary measure. For some regions, like Eastern and Northern Europe, austerity has indeed achieved its goal; it has successfully reduced their debts. In this region, Poland retains the highest amount of debt as a percentage of GDP at 56 percent in 2011, and it is being lauded as a success story by austerity advocates. However, its growth forecasts have recently been reduced to as low as 2.5 percent, with similar forecasts being made for other countries in the region–precisely because their austerity policies are bleeding them dry. Even successfully executed austerity policies are failing to address the recession.

Now Spain, Greece, and other deeply indebted nations are scrambling to impose austerity on their constituents and economies to undo years of irresponsible economic policy. But there’s no indication that austerity will even help. In the wake of Hollande’s victory in France, he and his advisers are already drafting potential solutions to the eurozone crisis in France; he plans to increase spending by 20 billion euros and to increase taxes by 29 billion euros. It is up to European lawmakers and policymakers to get on the bandwagon and give up on austerity, which is inflicting unnecessary pain on millions.

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Dovilas Bukauskas is an editorial assistant at World Policy Journal.

[Photo courtesy of shutterstock.]

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Anonymous's picture
Brilliant piece, well summed


Brilliant piece, well summed up. Complements the Foreign article by Raghuram G. Rajan in Foreign Affairs. My own thoughts- http://amalvarghese.com/2012/05/09/powereast/
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