In today’s Financial Times, Gideon Rachman proclaims, without even a hint of irony (OK perhaps I am a bit tone deaf, but in this case, I don’t think so) that there is no alternative to austerity in the Eurozone. Rachman notes further that despite the rhetorical objections to austerity now being raised by the likely winner of the French Presidential election next Sunday, the socialist Francois Hollande, even Mr. Hollande will be unable to do more than tinker around the edges of a tight fiscal policy that is being imposed by circumstances on the bloated European welfare states now comprising the European Union. Mr. Rachman is a clever fellow, and he has a way with words, and makes several good points. For example,
If building great roads and trains were the route to lasting prosperity, Greece and Spain would be booming. The past 30 years have seen a huge splurge in infrastructure spending, often funded by the EU. The Athens metro is excellent. The AVE fast-trains in Spain are a marvel. But this kind of spending has done very little to change the fundamental problems that now plague both Greece and Spain – in particular, youth unemployment. . . .
But warming to his subject, he starts to get a bit confused.
As for Italy and Spain, they are not cutting their budgets out of some crazed desire to drive their own economies into the ground. Their austerity drives were a reaction to the fact that markets were demanding unsustainably high interest rates to lend to them. There is no reason to believe that the markets are now suddenly prepared to fund wider deficits in southern Europe. The “end austerity now” crowd respond that it is the responsibility of Europe’s dwindling band of triple A rated countries to go on a consumption binge and so pull their neighbours out of the mire. But the assumption of unlimited Dutch and German creditworthiness is unconvincing – as the market reaction to the Dutch failure to agree a budget, last week, illustrated.
Mr. Rachman, like most supposedly knowledgeable commentators can’t seem to get the difference between a debt crisis (which is what Greece had) and a nominal GDP crisis (which is what Spain and Italy are having). Markets are demanding high interest rates from some countries because of a risk of default caused not by overspending, which has been going on for years without causing the bond markets to panic, but because in Spain and Italy public debt is now growing faster than nominal income (which is actually contracting). The Dutch failure to agree on a budget is itself attributable, at least in part, to the fact that nominal income began contracting in the Netherlands in the last quarter of 2011 as did nominal income in the Eurozone as a whole. And if that continues long enough, then Mr. Rachman is indeed right that not even German creditworthiness can forever be taken for granted.
Mr. Rachman then widens his discussion to France:
Even in France, the centre of the revolt against austerity, it is hard to argue that the problem is that the state is not doing enough. This is a country where the state already consumes 56 per cent of gross domestic product, which has not balanced a budget since the mid-1970s, and which has some of the highest taxes in the world.
Mr Hollande, who is not an idiot, knows all this. That is why, behind all the feel-good rhetoric about ending austerity, the small print is less exciting. In fact, all the Socialist candidate is promising to do is to take a year longer than President Nicolas Sarkozy to balance France’s budget.
Mr. Rachman is no idiot either, and he is right that most European countries would probably benefit economically from shrinking rather than expanding their public sectors, allowing increased scope for the private sector to create wealth. But that long-term problem is not the source of the current crisis. What Rachman seems not to have grasped is that the address for a solution to the real crisis in the Eurozone — the nominal GDP crisis — is in Frankfurt — by some random coincidence the seat of the European Central Bank.
The ECB, seemingly in thrall to the whims of Mrs. Merkel and German inflation-phobia, is stubbornly refusing to ease monetary policy, a step that would do more than anything else to solve the Eurozone nominal GDP crisis, aka the debt crisis. In the 1930s the way out of the Great Depression was to leave the gold standard, and in every country that had sense enough to escape from the golden fetters that were imprisoning them in the Depression, a recovery started almost immediately. Escaping from the euro is now much, much harder than leaving the gold standard was in the 1930s, so it is only the ECB that can provide an escape from this crisis. But Mrs. Merkel refuses to allow the ECB to do so, and today the clever Mr. Rachman, whether intentionally or not, provides her and the ECB with a useful tactical diversion, distracting everyone from their responsibility for the ongoing tragedy now playing itself out in Europe.