7 February 2012
Romania has become the latest EU country to see its government collapse in the face of planned austerity measures. Isn't it time to think again, asks Jason Walsh.
Following Greece and Italy, both of which have seen governments tumble and be replaced by "technocrat" administrations, Romanian prime minister Emil Boc has quit, saying the move would "defuse political and social tension".
Ireland, Spain and Portugal also saw changes of government, albeit in rather less dramatic circumstances.
In all cases, from Athens to Athlone, one thing remains constant: austerity.
Indeed, Mr. Boc's defence of his government's tax hikes and salary and service cuts could have come from the lips of any of the leaders of the aforementioned countries, either the outgoing bad pennies or their freshly minted replacements.
"I know that I made difficult decisions, but the fruits have begun to appear," said Mr. Boc. "In times of crisis, the government is not in a popularity contest, but is saving the country."
Mr. Boc's words are worth considering for a moment. It is self-evidently true that politics is a popularity contest. That's what it's supposed to be, and anyone who says otherwise is skirting close to anti-democratic sentiments. On the other hand, it is also true that elected politicians must sometimes lead public opinion, rather than merely reflect it. If difficult decisions are required, then they must be taken.
But, really, these are just truisms – and the facts in the case of the various European austerity programmes bear consideration, too.
Without even delving into the details of just why debts are seen as un-negotiable, there is also the small matter that current policies are unable to lift countries out of stagnation. By raising taxes and cutting salaries and jobs (known as "internal devaluation") the hope is to balance budgets, and, in the longer term, gear economies for export. Export need not mean the sale of material goods across borders, and in fact it increasingly means anything but. It may be the hope of growing foreign tourism, it may be the hope of attracting foreign-oriented service jobs such as international call centres, but no matter what is planned, the idea is to draw capital into the economy from abroad.
Which is fine. Except for a few small matters.
First of all, if everyone is attempting to attract massive amounts of foreign investment it rapidly becomes a race to the bottom. Secondly, if everyone is "exporting", who precisely is going to pay to import goods and services?
This is the fatal flaw of austerity: underconsumption, which is well understood on a domestic level, but also applies across the EU.
Plenty of politicians and economists talk about national budgets as being akin to a household budget. This analogy is fine as far as it goes. Who wants to run a deficit and pay vast amounts of interest on loans, after all? But household budgets are not economies. A household is not its own biggest consumer. Depressing spending power results in a drop in consumption which, in turn, leads to slumps in production, thus creating a vicious cycle where economies go into longterm slumps.
Falling domestic consumer demand is far from being the only problem. During times of major economic uncertainty – such as now, for instance – this also works on an international scale, with countries engaged in widespread belt-tightening exercises unable to import foreign goods and services. In addition, businesses facing falling sales or massive debt repayments naturally cut down on capital spending, while outside investment is deterred from the risky business of productive activity, going instead into safer, or simply decadent, markets. In an era – pre-bust – already marked by a decline in longterm capital investment in productive activity, which resulted in an over-relaiance on consumer spending, this risks the creation of markets awash with goods and services no-one can afford.
As real living standards fall across groups of countries, such as say, oh, the European Union, those that rely significantly on external demand such as Germany may soon find that exporting austerity programmes mean they are importing poverty.Image by Dracula&stuff. CC licenced.