An interesting post on austerity over at the Economist’s Free Exchange blog. It makes the point that British business – generally in favour of austerity measures when they were first introduced back in 2010 – is now beginning to change its mind. It’s not difficult to work out why: Britain is facing a third quarterly decline in GDP, with a 0.5% contraction in the British economy expected for the second quarter of 2012. For the UK this is particularly galling given the fiscal boost of the Olympics and the expectation that this would mean a heady summer for at least some British businesses. Perhaps it is true that as many people left the UK as entered it for the Games, making the net effect close to zero.
The Economist’s post suggests that the tide is perhaps turning in the UK, with austerity giving way to a new consensus around pro-growth measures. It notes that Cameron’s government is considering an “economic regeneration bill” for the Autumn and that Boris Johnson – with an eye perhaps on the Tory leadership – is talking up the need for big government infrastructure projects (based around London, of course).
The difficulties faced by the UK economy should give food for thought to those arguing that the route to economic growth lies via an exit from the Eurozone. One might have expected the UK to boost competitiveness through cheapening its currency but – on the contrary – the British pound has become something of a safe haven for those with lots of cash. Life outside the Eurozone may mean currency flexibility and low borrowing costs but that isn’t helping the British economy. The debt burden for individuals and businesses, incurred in the heady pre-2008 years, is still depressing growth and holding back new investment plans.
The idea that the tide is turning at the level of elite opinion is difficult to substantiate. There were always voices calling for moderate fiscal stimulus alongside cuts in government spending. Back in 2010 the debate between the Tories and Labour was not about whether the government should drastically reduce spending – both agreed that it should – but it was all about timing. Shock treatment versus gradual reductions eased along via some discretionary spending. Austerity was the backdrop with the debate focused on how, not if. Little, it seems, has changed.
As noted on The Current Moment last week, the debate in the US presidential campaign is also about how the government’s deficit can be reduced, with both camps fighting over who is more credible in their deficit-cutting plans. In France, a government was elected with an ostensibly pro-growth agenda. In his campaign speeches, Hollande regularly fulminated against austerity politics, claiming he represented an alternative. And yet – bar the few measures introduced that are intended to put a little more money in people’s pockets – the real challenge for the Hollande government is the 2013 budget and finding the money to meet its balanced budget obligations. Much to the chagrin of the left of the Socialist Party, Hollande has signed off on the EU’s fiscal compact with little regard for the growth measures he had promised. Budget cuts will be financed in part via higher taxes but also via spending cuts. The Greek premier, Antonis Samara, is about to undertake a desperate trip to Paris and Berlin where he will ask for a bit more leeway in his efforts at balancing the Greek deficit. Merkel and Hollande are shifting all responsibility for the decision on whether to grant Greece an extension to the Troika, as if the issue was a technical one to be decided by accountants from the European Commission. From the US through to Europe, there is little evidence that the tide is turning.
Even though economies are stagnating under the burden of austerity measures, the intellectual case for an alternative still needs to made. Until then, it will be more of the same.
thecurrentmoment 
“Life outside the Eurozone may mean currency flexibility and low borrowing costs but that isn’t helping the British economy.”
But is that because currency flexibility and low borrowing costs don’t help the economy, or that they’re not being used because of a misguided economic strategy? Low borrowing costs, for example, don’t help you if you don’t actually borrow. The cost of long-term government debt is at such a historic low that the state could borrow lots of money and use it to finance stimulatory spending. But it does not do so, for reasons of ideology (austerity is the only game in town) and fear (that the bond markets will revolt). The fact that the pound remains stubbornly high, despite “quantitative easing”, suggests that this fear is misplaced. Capitalists need some place to stash their money, and a bit more borrowing is not going to frighten them all off. If I’m right, there are real advantages to being outside the Eurozone, but these are only potential, and must be actualised through government strategy.
Excellent point Lee. The UK government may have more freedom in its economic policy in principle but it does not seem to be using it. Which suggests that Eurozone membership itself is not the great constraint it is made out to be because even governments outside the zone are holding back from exercising discretion in macro-economic policy. At issue is something deeper about the nature of politics and the problems executives have in exercising discretion. Eurozone membership is often cited as the great constraint but the UK proves that this is not so.
Your very good point underscores how elites have always used the EU as a strategic device and a ready-made excuse, first locking in policies institutionally at the international level and then saying domestically that they can’t do anything about it. That said, I don’t think that means there aren’t real constraints involved in Eurozone membership. It just means that, if one exited the Eurozone, one would only escape a certain set of structural constraints and still be bound in others. And those constraints for a country like Greece, for example, are quite different to those faced by the UK. Obviously they could not borrow to fund growth even if their imagination-starved political elite wanted to.
Are we really to believe that the UK government has actually implemented meaningful austerity? Many think tank reports suggest only a fraction of proposed cuts have occurred. The fact that the fire on the Elgin offshore gas platform caused a billion-pound hole in government revenues for July – bringing the deficit screaming back into the red – should give pause for thought.