Austerity and Structural Reforms

In Crisis, EU Wields More Carrot, Less Stick – WSJ.com.

This article contains some interesting analysis. I agree with its main point; specifically, the EU is changing the focus of its plans from the stick to the carrot. While the EU is attempting to present a different perception of its activities, in reality the practice will be the same.

One very important fact is omitted from this article. The creditor countries, Germany, the Netherlands, Finland and Austria, have electorates who resent these bailouts. In all of these countries, the budgets have undergone versions of austerity in the past few years. Social spending has been reduced and even retirement ages have been raised.

Now, the debtor countries want to be helped. Well, after undergoing austerity yourself, wouldn’t you be resentful of countries balking at undertaking the same measures? These resentments are important and must be taken into consideration whenever bailouts are discussed.

The creditor countries may grudgingly accept that their partners need their money, but the electorate is going to make sure that they pay for it with austerity. The Netherlands has elected a pro-euro government, and Germany overwhelmingly, over 70%, approves of Merkel’s handling of the crisis. Giving the money away is not as big a problem as people think; it’s the conditions.

Bailouts and aid will continue to flow from the north to the south, but there will be conditions to make wealth transfer politically palatable. Additionally, austerity, which really means cutting the budget deficit, has to be part of any plan to return the southern countries back to economic health. More debt does not cure the problems of too much debt.

What is driving the perception shift from austerity to policy changes is the French situation:

But analysts say there appears to be a growing realization that financial markets are more than willing to give these governments more time to lower their deficits, so long as they pass other economic overhauls seen as necessary to restart economic growth.

This passage seems to have nothing to do with France, and yet it has everything to do with France. Up until elections, the French plan centered around austerity. Hollande is now in power, and any good socialist knows that cutting government spending is anathema to socialism. France will not make the 3% budget target this year or any year in the immediate future.

While Sarkozy supported the German austerity bias, Hollande most assuredly does not. Therefore, the rules will be changed and all countries will be allowed higher budget deficits, because the French continuing to ignore the 3% ceiling means that all of the other countries will have to get an exception, too. Except for Greece, that is.

A Greek failure could start a crisis that will cause the breakup of the eurozone. Fortunately, it is quite cheap to keep Greece from defaulting. That is the goal of the EU, to keep Greece from defaulting, not to actually return Greece to a path to economic health.

Ultimately, any good program will contain both austerity elements and structural reforms, so the perception change only matters in that it may make the austerity portion more palatable to both the northerners and the southerners. Each country in trouble needs to do both.

 

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4 thoughts on “Austerity and Structural Reforms

    • I am sure that the politicians will avoid the truth as long as possible. The American fiscal condition is just as bad as France’s but for different reasons. I will be writing about that in the future.

  1. “More debt does not cure the problems of too much debt.”

    Nor does reducing debt cure the problems of a banking system built on a debt-fueled Ponzi scheme (which the euro is). What’s more, all kinds of austerity has been imposed on EMU periphery sovereigns, yet euro debt has only skyrocketed higher. What’s up with that? More of the same zero due diligence for a massive imperial heist disguised as a “monetary union” whose “legitimacy” supposedly will be secured via a banking and fiscal union? Europe is an insane asylum.

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