Europe's Austerity Struggle

Blowing bubbles – then shouting about them...

ONCE AGAIN, the European press is trumpeting the triumph of the prodigals after a week in which both the Spanish and the French were accorded more time to get their budgetary house in order, writes Sean Corrigan for the Cobden Centre.

Given the downward economic trajectory of the pair, the move has something of a whiff of force majeure about it – and the German finance minister Schaeuble acknowledged that, yes, the fiscal pact around which he and his boss have built so much of their electoral credibility did in fact encompass a 'certain flexibility'.

In the wake of a mass demonstration on the streets of Paris at which the Left Front's heavily-defeated presidential candidate Melenchon fulminated that "We do not want the world of finance in power!" – an expostulation delivered to the strains of 'Ca ira!', one supposes – Schaeuble's Gallic counterpart Moscovici was hardly in a position to soft-pedal the German concession, instead vaunting grandiosely in his turn that, "We are witnessing the end of the dogma of austerity... we are at a decisive turning point in the history of the European Project".

Brave words, indeed, but Frau Merkel, for one, begged to disagree – or, at least, to dissemble for the benefit of her domestic audience: 

"If one regularly spends more than one earns, something must be awry," she opined, while one of her party's spokesmen, Steffen Seibert declared that, "Our contention is that the... crisis has its roots in the overindebtedness of many member states... in too low a degree of competitiveness." No prizes for guessing to whom he was referring.

Last week's supposed poster boy for the new laxity, Commissar – sorry, Commissioner – Barroso, was also out on the circuit, denying that he had endorsed any such slippage by telling Welt am Sonntag that he had been "deliberately misinterpreted". Barroso added that – au contraire, mes amis – "growth which depends upon debt is unsustainable" and that the blame for the 'Project's' woes should not be pinned on German policy but rather on "excessive outlays, lack of competitiveness" – that word again – "and irresponsible finance." "Each nation," he went on, "should look to clean up the mess on its own doorstep."

Amid all this posturing, it does strike your author as a touch ironic that while the commentariat treats Europe's persistence with its failed experiment in 'fauxterity' as a clear and undeniable symptom of the mental inadequacy of its ruling elite, the members of that same consensus themselves retain what is, if anything, an even more delusional faith in the combined evils of inflation and Big Government as the magical means with which to conjure away all our present woes.

In case you hadn't noticed, fellas, we have been reinforcing monetary-fiscal failure for the past five years, by continuing to ply the patient with ever stronger doses of what it was that made him ill in the first place. Just multiply the DAX by the youth unemployment rate if you want a snapshot of where your approach has gone horribly wrong – of where you have let the GINI out of the bottle, as it were – and you might realise that if there is anyone who needs to reconsider their attachment to a discredited dogma, it is you!

Whisper it, but even your hero seems to be getting the drift. For witness that, in his latest speech in Rome, Mario Draghi was happy to say that "Fiscal policies must follow a sustainable path, separate and distinct from cyclical fluctuations. Without this prerequisite, lasting growth is not possible... Particularly for countries with structurally high levels of public debt...", before going on to assert far more boldly that – as we have said since Day One of the crisis – "...to mitigate the inevitable recessionary effects of fiscal consolidation, the composition of such measures must favour the reduction of current public spending and of taxes, particularly in a context such as in Europe where taxation is already high by international standards...." [our emphasis].

Though we must be careful not to read too much into the man's words, it is hard not to hope that this might reflect the first fragile flowering of a genuinely new approach – of the inauguration of a policy of REAL austerity, this time of the invigorating kind which incorporates a partial lifting of the deadening hand of the state, rather than the enervating, bastardised version of slower spending growth and rapidly rising taxes with which we have been so far afflicted and which has only served to compound the financial shock delivered by the collapse of the last bubble.

All this remains to be seen but, in the here-and-now, the temptation to use this effusion of political hot-air as an excuse to buy yet more stocks, more ailing sovereign debt, and more junk credit has become well-nigh irresistible. This is especially so since Super-Mario not only overrode what he hinted was some internal opposition to an official rate cut at the latest ECB meeting, but also managed to leave dangling before a slavering crowd of stimulus junkies a tantalising hint that he might soon push the level below zero. In case we were too obtuse to get the point, he underlined his intentions with another of his famously portentous, almost Delphic pronouncements: that even though the ECB council was still scrambling to divine whether anything could possibly go wrong with such step into the unknown, he, Draghi, stood 'ready to act'.

It was not the first time in recent days, of course, that the marbled halls of Mount Olympus had echoed to the sonorous baritone of the Gods as they sought to reassure us poor mortals that they had matters well in hand: that they had taken time off from their weighty contemplation of the sublime, the eternal, and the infinite to tend instead to our petty concerns. Had not the Bernanke Fed subtly quashed all thoughts that it might soon 'taper' its own open-handed distribution of milk and honey with that one, equally Pythian phrase: "the Committee is prepared to increase or reduce the pace of its purchases to maintain appropriate policy accommodation"?

How can a man NOT want to buy the market in the face of the solicitous stance being taken by the venerated possessors of such unchallenged omniscience?