Guest post by MARC SAXER
Ten reasons Why Austerity is Dangerous Fallacy
Another European summit without any resolution has passed. Even if a last minute settlement for this round can be reached, it would most likely continue the austerity policies of the last years. In any event, the next showdown would be just around the corner. Instead of tackling the risks of a global financial crisis, the collapse of the European integration project or the undermining of democracy, Europeans are fraying over olive tree subsidies and pensions. The debate over Greece is out of touch with the real challenges, and leads to flawed policy responses.
It is infuriating to watch Europe tumble down the path of austerity. Frugality! Discipline! Rules! The guardians of virtue seem to have turned a deaf ear to all expert advice. One Nobel Prize Laureate after the other cautions that too much fiscal bloodletting might just kill the patient. Amartya Sen. Paul Krugman. Joseph Stiglitz, Jeffrey Sachs. In Europe, Jürgen Habermas, Ulrich Beck and Thomas Piketty chimed in. Even the chief economist of the International Monetary Fund, Olivier Blanchard had to admit that the tax hikes and spending cuts have created more havoc than the architects of austerity have ever deemed possible.
Austerity is tomfoolery. Here are ten reasons why.
- Austerity is strategic folly. In order to discipline an economic appendix of Europe, the troika of European Commission, European Central Bank and International Monetary Fund risks the next global financial crisis. The write-down of a haircut for Greece’s creditors would be dwarfed by the cost of another round of bailouts and recession.
- Austerity is political suicide. The new nationalist chauvinism is fanning the flames of right wing populism all over Europe. While UKIP is pushing for the Brexit, Marine Le Pen is running on a Frexit platform for the French Presidency.
- Austerity is dangerous brinkmanship. After centuries of war, the European integration introduced peace to a divided continent. The wars at Europe’s periphery should be a dire warning of how fragile this layer of civilization really is.
- Austerity is an economic self-goal. Fiscal frugality further weakens aggregate demand and deepens the recession in debtor countries. It is telling that the often cited “success cases” Iceland, Lithuania, and Latvia have started to grow the very moment austerity had been ended.
- Austerity is a fiscal miscalculation. A contracting economy makes the debt ratio even more unsustainable, and blocks the return of debtor countries to bond markets, keeping them dependent on recurring bail-outs.
- Austerity is executed by an imperial technocracy, which undermines national democracies in the interest of the financial markets. After the elected governments of Greece and Italy were replaced by technocrats in 2011, today austerity ideologues question the legitimacy of the newly elected leftist government in Athens.
- Austerity is a developmental non-starter. Repeating the devastating structural reforms promoted under the Washington Consensus around the world, austerity fails to understand that much needed structural reforms such as the fight against corruption and a more efficient tax collection – against the resistance of powerful patrons – can only be implemented with the strong support of a broad change alliance. Austerity, however, undermines this much needed popular support.
- Austerity is social injustice. The bail-outs of European banks and investors have been paid with the loss of life chances by millions of common citizens.
- Austerity is a geopolitical shot in the foot. It weakens and disunites Europe in the very moment when it is challenged by a resurgent Russia, a refugee crisis in the Mediterranean and a meltdown in the Middle East.
- Austerity is historical amnesia. The reconstruction of Germany and France after the war would have been impossible without debt cancelation and the generous aid of the Marshall plan. Germans in particular should remember the tragic Chancellor Brünung who aggravated the Great Depression with ill-conceived austerity policies, paving the way to power for Hitler.
With so much at stake, why isn’t the policy changing? Why ever more ultimatums, calls for further cuts and demands for a primary surplus? Because the austerity ideologues have discovered the holy grail of political communication: Greece. Greece is the poster boy for a country in need of reforms. A weak state, a rampant bureaucracy, corrupt politicians, tax-free oligarchs, vast military spending, and foolhardy debt levels make the perfect case. Nobody, not even the Greeks themselves, are denying that this country needs reforms. On the other side, European taxpayers are right to ask why they have to foot the bill for fiscal brinkmanship and speculative hazard of others. Indeed, it would be interesting to debate which recipes are better suited to treat this patient: Keynesian stimulus or Hayekian austerity, Beijing or Washington Consensus, Syriza or IMF.
However, this is the wrong debate at the wrong time. Instead of the risk of a financial crisis, Europeans fray over subsidies for olive trees. In place of discussing a response to Russia’s challenge, they are counting ammunition for Greek tanks. Instead of standing up to the undermining of democracy, they fray over the pension fund of Greek grannies.
To be clear: of course Greece needs to be reformed, and Europe needs rules by which everyone is playing. But this debate over Grexit is a dangerous diversion, and will lead to flawed responses. This is why the debate needs to be shifted back to the center, the policies of the troika, and its national allies. It is here where the future of Europe will be decided.
MARC SAXER is the Coordinator of the Asia-Europe Economy of Tomorrow project and Director of India Office of Friedrich Ebert Foundation (FES), a German political foundation committed to the values of social democracy. Views expressed here, are his personal views.