Philip Arestis and Malcolm Sawyer
The months of April and May have been tumultuous on the European political scene – the French elections have seen the return of the first Socialist President in 17 years on elements of a pro-growth, anti-austerity agenda, the Greek elections with the poor showing of the previous dominant parties associated with the severe austerity agenda being imposed on Greece, the fall of the Dutch government over budget measures, the poor showing of the Christian Democrats in German Federal elections.
Growth is creeping back onto the agenda, and the austerity mania is at last encountering resistance. This is in sharp contrast to statements like “Austerity is the only cure for the eurozone” (Wolfgang Schauble, German Finance Minister, The Financial Times, 6 September 2011). Similar statements have been made by the President of the Commission who suggested recently that stepping up investment should only follow after stability measures and structural reforms have been implemented. This clearly implies no growth-enhancing investment initiatives should be implemented before the neoliberal policy model, with its rolling back the role of the state, is fully implemented. The newly elected French President, along with other European leaders, has been trying to add ‘and growth’ to ‘austerity’ in the form of a ‘Growth Compact’; however, the ‘fiscal compact’ is still intact. And as the President of the European Central Bank suggested, at the press conference of the 3rd of May 2012, the ‘growth pact’ means that “there must be a continuation of structural reforms in all the economies of the euro area”.
This is clearly all very puzzling given the experience and knowledge since Keynes’ 1923 “The Economic Consequences of the Peace,” and his 1936 “General Theory”; namely that when demand is weak with spare capacity and significant unemployment, cutting down public spending and increasing taxes is anathema. Clearly the dominance of the neo-liberal agenda and its entrenched position in European (and especially German) economic and political debates present major hurdles to be overcome. The gathering of anti-austerity forces still face the ‘eliminate-the-deficit’ mentality, which is becoming entrenched in law in many countries and within the European Union in the fiscal compact (more akin to a fiscal suicide note). Yet there is plenty of evidence that austerity has not, and is not, working even on its own terms. Fiscal austerity only produces more austerity when GDP is stagnant or falling, leading to higher debt and higher unemployment with living conditions being depressed continuously.
It is difficult, if not impossible, to see how any progress can be made until that fiscal compact is neutered, whether through its repeal or at least effective acknowledgement that it is non-operational. As we argued in our December 2011 blog, entitled “The EU Fiscal Compact”: “The ‘fiscal compact’ is anti-democratic; it is one that seeks to impose balanced structural budgets that often cannot be achieved and which will further unleash the forces of fiscal austerity”. The results of recent elections in a number of European countries seem to validate this argument.
Stiglitz has recently observed that “There has never been any successful austerity program in any large country” (Remarks at a panel discussion in Vienna on Thursday 25th April 2012). It is necessary to go further and say that there has not been an austerity programme, which has revived an economy (see, for example, Arestis, 2012). In those cases where a fiscal consolidation programme has gone alongside some revival of the economy, it is in spite of the austerity programme, not because of it. When exports grow (through expansion of world trade, devaluation) then economic activity can revive and budget deficits fall. But the growth of exports owes nothing to fiscal austerity and much to good fortune. It can be readily acknowledged that a revival of demand is a necessary condition for growth and higher employment. The austerity lobby seem to believe, contrary to evidence, that deflating demand is the way to increase demand.
The low interest rates, which have prevailed now for nearly four years, have had little, if any, effect on reviving investment, and the low levels of confidence are not conducive to the stimulation of investment (changes in the rate of interest without direct stimulus of effective aggregate demand have very little impact on investment; empirical evidence clearly shows that expectations of economic activity is a much more important determinant of investment than interest rate changes). Yet a revival of investment would add to demand and lay down additional productive capacity, which facilitates growth and employment; and it would lower the budget deficit as economic activity and tax revenues rise.
Within the European Union, there is need at both the national and the Union level for stimulation of investment. At the Union level, the European Investment Bank (EIB) provides an institution, which can raise funds in the market that can be channelled into investment. It has the advantage that it operates in such a way that its borrowing does not count as part of any national or EU budget deficit. The EIB could be utilised to raise funds to finance growth and employment, particularly in the regions suffering from high levels of unemployment. Indeed, strengthening the EIB, along with the new European Stability Mechanism (ESM), to provide a rescue package and loan assistance to member states, should be the way forward.
The President of the EMU at the press conference referred to above seems to agree with this proposition when he suggests that “increasing the European Investment Bank (EIB) action and redirecting the EU funds towards the low income areas” can create jobs “basically by increasing investment and enhancing infrastructures”. However, “When we talk about infrastructure and fiscal consolidation, it is certainly much better to consolidate through the reduction of expenditure, especially current expenditure and not capital or investment expenditure, rather than through increases in taxes”.
We would suggest, though, that dynamism in the economy is what is needed, which can only be achieved by growth in new and viable sectors.
REFERENCES
Arestis, P. (2012), “Fiscal Policy: A Strong Macroeconomic Role”, Review of Keynesian Economics, Forthcoming.
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