It is hard to know which wing of the austerity debate is more annoying. On one side is the anti-austerity phalanx of left-wingers, American professors and other assorted hangers-on. On the other stands the German-led group which holds that you have to keep shoving the medicine down your throat if you want to recover, and that the quicker you take it the better.
The Greek crisis has led to a warping of the whole argument about national budgets, with austerity now a dirty word.
The flaw in the pro-austerity argument is the failure to recognise the impact that spending cuts and tax hikes can themselves have on economic growth – and this is where our American professor friends have a point. It is hard to cut your way out of a budget crisis, particularly in an era of low growth and low inflation. But much of the “anti- austerity” lobby seems to want to live in a world where you can default on your debts and live on someone else’s money indefinitely. For anti-austerity, read someone else should pay – the bondholders, the bankers, the rich people, taxpayers elsewhere in Europe, whoever.
Nobody is a fan of austerity. How could you be? But sometimes you need to raise taxes and cut spending because your country has a big deficit. There is nothing ideological or controversial about this, but call it austerity and it sounds unreasonable. The big questions in the euro crisis have been the pace at which austerity has been implemented, and which social groups have borne the burden. And about the lack of an overall view at European level which would have balanced cuts in countries with big deficits with expansion in more solvent states, and an earlier move to loosen monetary policy and “print money”.
Pro-growth policies
This is the real meat of the debate – the conditions which led up to the extraordinary clash between Greece and creditors, and what it means for the future.More pro-growth policies at a European level would have eased the road for countries such as Greece and Ireland. Both countries also suffered from taking on EU-IMF bailout loans which were used, in part, to repay financiers. But make no mistake, both Greece and Ireland had yawning underlying gaps in their budget sums and spiralling debts which also required spending cuts and tax hikes. You can’t live forever on the never never - and both Greece and Ireland delivered major cuts in their deficit.
Ireland got through austerity in part because we started from a much better position, with a lower debt level. Greece’s debt to GDP ratio was over 100 per cent before the crisis even started. The greater underlying strength of our economy, and particularly its export base, was also key. While the domestic economy here was being flattened by spending cuts and tax hikes, resilience among our exporters helped to support things – and then allowed us to benefit from some pick-up in international growth in the last couple of years. Ireland stuck with it and got the momentum back moving in the right direction. Greece never quite managed it, despite a 2012 debt restructuring.
The confidence issue is one of the arguments for getting austerity over with as quickly as reasonably possible. Correcting your budget position will, by definition, depress growth and the cuts and tax hikes can leave a lot of damage in their wake. Getting it over with can help to remove uncertainty and rebuild confidence. It allowed us to benefit from better growth and an inflow of foreign funds over the past couple of years. The flip side – the endless months of delay we have seen in Greece, culminating in the last chaotic fortnight, destroyed confidence and have made the journey back a longer one.
Countries can run budget deficits for long periods, but not ones that are growing year on year, pushing up debt levels. IMF chief economist Olivier Blanchard blogged this week to point out even if Greece defaulted on all its debts when the first 2010 bailout was agreed, it would still have had a budget deficit of 10 per cent of GDP. Any programme was going to involve moves to address this, even if it is now clear the first bailout should have written off debts on the other side of the equation. “Fiscal austerity was not a choice, but a necessity,” he wrote.
Anti-austerity noise
Yet much of the anti-austerity noise we are subjected to ignores this. In Ireland, you could argue about the pace of Irish budget cutbacks, if you wanted to, though broadly I think it was better to get it over with. You could also argue about how the pain was spread. But with a budget deficit of over 10 per cent of GDP as the crisis hit – before account was taken of the direct costs of the banking crisis – you can’t argue that we could have continued on regardless, even if we had burned every bondholder we could get our hands on.
We got through it – and still have a long road to recovery. But the conundrum of how to save Greece remains. The Greek economy is heading downwards fast. The creditors now demand more austerity. They should offer debt restructuring in return , tied to the achievement of certain goals. Regaining positive momentum in Greece is now a huge job. Austerity may be inevitable – apart from anything else, the rest of Europe won’t sign up for a deal otherwise. But without a realistic plan for a return to growth this plan, like the last two, won’t work.