Austerity in Europe

31 Aug

In France, the word rigueur is associated with political failure: it brought down the government of Raymond Barre in the late 1970s, marked the abrupt end to François Mitterrand’s experiment with “socialism in one country” in 1983-4 and coincided with the downfall of Alain Juppè’s government in 1997. Unsurprisingly then, current president Nicolas Sarkozy and his finance minister, François Baroin, are refusing to employ the term rigueur to describe their own recently announced austerity plan. Looking at the details of the plan, there is little doubt that rigueur is what lies ahead. Strikingly, though, France’s plans are relatively restrained compared to some others undertaken by national governments across Europe. Le Monde recently detailed these different austerity plans, reproduced below.

Europe’s Austerity Plans

Country Size of cuts Methods include…
France 12 bn Euros (2011-2012) Exceptional 3% tax on highest earners; tax hikes on alcohol and cigarettes
Greece 28 bn Euros of cuts (2011-2015); 50 bn Euros raised through privatisations Cuts in salaries of public workers; rise in retirement age; freeze on pensions; rise in VAT; lengthening working week of civil servants
Italy 45.5 bn Euros (2012-2013) Freeze on hiring and salaries in public sector
Portugal Approx. 20 bn Euros Privatisations
Germany 80 bn Euros (2010-2014) Tax rises, privatizations
Spain 65 bn Euros (2011-2013) 5% cut in public sector salaries; pension freeze
Ireland 15 bn Euros (2011-2014) Reduction in welfare spending and cut in minimum wage; cut in public sector employment
United Kingdom 95 bn Euros (2010-2015) End of fiscal opt-outs and modification of regime of family benefits; freezing of public sector salaries

Source: Le Monde (27/08/11)

Compared with a few months ago, governments and economists seem to have realized that if austerity is applied universally across Europe then it will lead to a collapse in growth. Medium-term fiscal rectitude combined with short-term stimulus is the message from the IMF, but not heeded by many European governments.

Those critical of austerity have tended to focus on its equity effects. Do the plans hit the rich more than the poor? This we saw was the line of attack of France’s Front de Gauche, led by Mélenchon. The theme of fairness also drives those out in the streets protesting against cuts. At issue for protestors is not the need to balance budgets so much as a desire to shift responsibility from ordinary taxpayers to risk-loving bankers. It is less a question of ‘should we pay’ so much as ‘who should pay’.

The size and nature of the plans listed above tell us two things. The first is that the approach taken by governments has been to freeze wages and cut social security. Exceptional taxes on high incomes have been levied in some cases but they are, as is made clear to everyone, only exceptions. The second is that those voices critical of the cuts have little by way of their own growth model to propose. Export-led growth demands a buyer of last resort to soak up exports. Austerity plans demand a laggard of last resort able to show by virtue of his own profligacy how well other governments are doing. These are all zero-sum options. Hiding behind the collective and consensual appearance of the Eurozone is competition between national capitals, referrred to by many as the “asymmetry” of the Eurozone. Whether or not this competition will be transformed into conflict will depend on whether the Eurozone is able to return to growth.

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One Response to “Austerity in Europe”

  1. Lee September 22, 2011 at 7:56 am #

    Your last point about the cuts being zero sum is very astute. It seems to me that governments know that their cuts will retard growth, but they’re all too afraid to reverse course since they’ll be castigated by their ‘partners’ and savaged by the bond markets. They all seem to be hoping that someone else will break first so negative attention will be focused elsewhere, while hoping that they will emerge from restructuring ahead of the pack. It is a perverse form of beggar thy neighbour.

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