The Cameron-Merkel-Sarkozy focus on austerity as the basis
for the solution to the European economic crisis – what Ed Ball’s has labeled “Camerkozy”
Economics – relies heavily on myth. The myth is that cutting public spending to
the bone while pursuing structural economic reforms (especially to labour
markets, tax systems and regulation), increasing unemployment and deflating the
economy will produce confidence amongst investors and spur growth. This
strategy, which ING refers to as “Austeria”, Paul Krugman, winner of the Nobel Prize
in economics economists, suggests is like wishing for the confidence fairy to
appear.
Greeks chose the Euro and are now waiting to see if their
elected officials can form a government, which looks unlikely and their exit
from the Euro now looks inevitable. Spain’s borrowing rate hit record highs at
7.3% for a 10 year bond and the rise in the UK’s long term youth unemployment is
800% from 2000. In all some 8.2% of Britain’s working population are
unemployed. No sign of the confidence fairy there.
Economic growth across the Eurozone and in Europe as a whole
is, to say the least, disappointing and this has led to an undermining of asset
prices and led to challenges to bank solvency. Governments are slow to react
and collective government is demonstrably not up to dealing with the crisis. Confidence
is sapped each time a “major fix” is announced – like the Spanish bank
bail-out, since such “solutions” do not inspire confidence in the political
leadership and will to deal with the crisis.
At the G20 is Mexico the EU Council President, Jose Manuel
Barroso, made clear that the EU was not there to be lectured by others, especially
the US whose banks he blames for all of the EU troubles. This may be thought of
as fairy speech – finding the evil fairy as far away from home as possible. His
outburst in Mexico shows why leadership is a challenge in Europe – he is
clearly not accepting that the decision to forge ahead with currency union
without fiscal and political integration and the decision to bend the rules and
ignore the facts so as to admit Greece to the Eurozone or the decision not to
toughen banking regulations are the root causes of Europe’s problem. Nor is he
accepting that the paucity of leadership in Europe, evident throughout this
crisis, is now making the problems worse.
What is needed are measures to stimulate demand. This
requires more public spending, more encouragement for corporations sitting on
substantial piles of cash to spend and invest, more encouragement for hiring
and a strong and relentless focus on reducing unemployment. Though in the short
term this may increase debt, this is the price to pay for the moral requirement
to create meaningful employment for all able to work. Once growth returns, then
Governments can resize their spending.
So as to stimulate the economies of Europe, some labour
market reforms and tax reform may be necessary. The focus of tax reform should
not be on reducing taxes for the rich but on ensuring equity in tax policy and
easing capital investment, stronger use of flow through shares and changes to
capital gains tax.
This is a strategy Paul Krugman has been promoting and it
has earned the label Krugmania. An analysis by ING suggests that the adoption
of Krugmania will lead to a significant boost to employment and GDP growth of
between 2.5 and 3% within twenty four months. While this may also lead to some
inflation, this is the cost of supporting a strategy focused on full
employment.
Britain has started to recognize that Austeria is not
working and has signaled that it will invest £140 billion ($225Can billion) in the economy through a
complicated scheme supporting private capital through government guarantees. Whatever
the merits of the approach (see a critique by Martin Wolf of the Financial
Times here),
which is aimed at making sure that the £140
billion doesn’t appear on the Governments balance sheet, stimulus aimed at
growth is occurring, albeit on a very modest scale. The Government is focusing
on how it should effect stimulus, not
whether or not to have stimulus – this is what is important here.
If you want the tooth fairy to appear, then you must put a
tooth under the pillow. If you want the confidence fairy to appear, you must
stimulate economic growth by putting public money into the economy. Fairies
will abound.
No comments:
Post a Comment