Austerity: Defending the Indefensible

The fight over austerity in Europe goes on. Today the EU Observer reports on yet another desperate attempt by Eurocrats to defend the indefensible:

EU leaders meeting in Brussels on Thursday (14 March) agreed to a more growth-friendly interpretation of deficit rules, but Germany and others insisted that austerity measures will work if given more time.

How much more time? This is the usual argument from economists of the Austrian school. In the long run, they say, austerity will bring the economy back to full employment. The one question they never answer is: how long is that run? To the best of my knowledge, only one economist with an Austrian slant in his scholarship has ever tried to seriously estimate the long run: in his book Unemployment and Macroeconomics, Assar Lindbeck claims that the restoration of full employment according to Say’s law – the core of the Austrian long-run argument – is 100 years.

I wonder how many believers in Austrian economics are willing to run for office on a pro-austerity platform and try to convince people to swallow the bitter pill because in as little as one century, there will be full employment and prosperity will be back to where it was before the current economic crisis.

Perhaps this is the realization that is setting in among some Eurocrats, which is why they are softening their stance – at least superficially. Perhaps. But I fear this is more wishful thinking than anything else.

Back to the EU Observer:

The softened wording – coming three years into the economic crisis, and amid rising unemployment and deepening recession in the eurozone – is being seen as a victory for France and Italy. Speaking after the meeting, French President Francois Hollande indicated that member states were going to be give [sic] more leeway to pursue investment in growth policies. … The summit conclusions note that existing “possibilities” within the rules governing the euro to balance public investment with fiscal discipline “can be exploited.”

This means either of two things:

1. The Eurocrats and the French and Italian leaders still have absolutely no clue as to why there is zero growth in austerity-ridden EU member states.

If this is the case, then Europe is still doomed. The “softer” stance is merely a smoke screen to ease the political pressure on national leaders, who are the ones facing the flak from voters, entitlement consumers and taxpayers. Austerity will continue.

2. The Eurocrats are beginning to realize that austerity is in fact the problem, but they have invested so much political prestige in it that they cannot back down.

In this case, we might actually see an erosion of austerity policies over this year. All that Europe need to catch its breath is austerity cease-fire, but that won’t help the continent get back to growth again. For that, Europe needs a completely different fiscal strategy, one that is built on a structural roll-back of the welfare state, combining targeted tax cuts with deregulations and targeted cuts in government spending.

If there is indeed an austerity cease-fire in the works, behind the political scenes of the EU, then it is in all likelihood going to be replaced with a French-style expansion of government spending combined with higher taxes. That is, namely, the only fiscal policy alternative that is being presented to Europe’s voters.

It is difficult to judge with any reasonable level of confidence which of these two interpretations is correct. According to the EU Observer, however, the first interpretation seems to be the accurate one:

Paris and Rome have been the most vocal about the need to balance austerity with growth and solidarity measures. But while the wording represents an acknowledgement that budget-cutting should not be the EU’s sole focus, austerity is to remain the cornerstone of the approach to the crisis. For his part, European Commission president Jose Manuel Barroso noted before the summit that more time is needed to for the benefits of austerity measures to be felt. German Chancellor Angela Merkel struck the same note. “It is clear that we are in an interim phase,” she said. Referring to data presented by the European Commission during the meeting on competitiveness, Merkel noted that while it showed some “progress” had been made, it also showed that more “time and determination” is needed. When asked about the recent Italian election, where the majority of voters cast their ballots for anti-austerity parties, Merkel said that former Italian leader Mario Monti, who introduced a swathe of cuts, had too short a time in office for the changes to have a positive effect.

The fact of the matter is that there is no economic model out there that can provide you with a time table for when austerity is going to do what. Critics of austerity would obviously not develop such a schedule, while its proponents – almost entirely in the Austrian camp – are against quantitative measures in the first place. Therefore, nothing of what Chancellor Merkel says is rooted in reality. It is purely an attempt at defending the indefensible.