When the EU offered a relief package to Spain so that Spain could support its ailing banks, crippled by profligate lending for a building boom that went bust, it was thought that this would “buy time” so that the EU could work on a much grander scheme for the Eurozone and its future – a scheme involving forfeiture of sovereignty and the development of integrated economies. The Spanish bail out bought about ten hours of time. Yet another monumental failure by the Merkelites - the harbingers of the strategy now known as “Austeria”.
Now that Spain has had its banks downgraded and its economy is in free fall as it seeks to raise debt driven revenue on the market, Italy is looking more and more precarious. If some significant and insightful leadership does not act quickly, it could get even worse.
What is clear is that the Austeria strategy is not working. What was intended as a correction and a stimulus to confidence is lowering demand, causing a depression and leading to uncertainty and economic disaster, especially for all those who are unemployed. Paul Krugman is right – what is needed in the short term is stimulus linked to a clear vision for a future for Europe which is not based on German imperialism.
A report by ING (available here) looks at the options for the future, based on a solid review of evidence and performance of the Eurozone economies. It proposed three key strategic components: reflation, redistribution and reform. Let’s look at each:
- Reflation – Paul Krugman’s strategy of making strategic investments in public infrastructure so as to create jobs, encourage demand and permit a modest degree of economic inflation as a precursor to reform is at the heart of ING’s thinking. In their strategic scenario’s, Krugmania emerges as the primary opportunity for serious action in the short term. The reform implications are embedded in this Keynesian strategy, but the start is more public spending, not less.
- Redistribution – one way of looking at Greece, Ireland and Spain is that the bailouts they have received are forms of transfer payments – a way of redistributing wealth from rich regions to poorer ones, something Canada has done since it began. Such mechanisms have been driven by crisis within the EU rather than formula and it is a shift to formal regulated mechanisms that is needed. This will come with strings – closer political integration.
- Reform – key reforms aimed at improving the competitiveness and productivity of the private sector in all EU countries (including tax reform, labour market reform and regulatory simplification) are essential for the medium to long term health of the EU. Also important, is a reform of government, especially social policy, health and education and taxation. Some of these reforms could be carried out by national governments and others require EU wide reform (eg. Labour mobility, regulatory reform).
While the EU remains enamored with Austeria, the real opportunities for significant and focused change will pass the EU by. Austeria will lead to failure and a likely implosion. Time for new leadership to step up to the plate.