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Neo-Liberal Austerity Keeps Europe Down

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Posted on Aug 26, 2014

By William Pfaff

1000 Words / Shutterstock.com

Shades of France’s notorious Third Republic! The latest French government has been summarily dismissed after only six painful months. It was certainly time for a change. President François Hollande’s poll ratings have plumbed new depths at 17 percent, while Prime Minister Manuel Valls had lost 9 percentage points in one month, down to 36 percent. With his usual indecision, the President has instructed Mr. Valls to go back and form a new government to carry on the same policies—the third in the space of one year—but excluding the trouble-makers who provoked this crisis.

The principal culprit is ex-Econom Minister Arnaud Montebourg, who during the weekend proclaimed irresolvable differences with the president’s economic policies and explicitly blamed Germany for France’s “descent into hell.”

Mr. Montebourg wants changes that seem gathering support in many places, including even Washington and the American university (thanks to the Nobel Prize economists Joseph Stiglitz and the indefatigable Paul Krugman). The appeal is powerful to the beleaguered countries of southern Europe, and recently at the IMF in Washington, and even from European Central Bank chairman, Mario Draghi last weekend at Jackson Hole. The message is: Stop the austerity in Europe, or at least apply some flexibility, before it is too late.

The latest French statistics have been awful. Income tax came in at 10 billion Euros less than last year, despite painful and unpopular tax increases. Growth was 0 percent in the last trimester, and France’s promise to the EU to bring the annual deficit down to 4 percent was officially broken. Even German growth was a surprising minus 0.2 percent for the last trimester. Yet one of President Hollande’s most recent policy decisions was to promise 50 billion Euros in budget cuts next year.

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Given the current dismal state of the European Union economy, which is now firmly under German control, one must ask why Angela Merkel and her government continue to champion austerity, seemingly against all reason, and why have these neo-liberal ideas come to dominate policy even more firmly in Brussels than in Washington?

The great John Maynard Keynes provided the answer, which one would think by now engraved on the conscience of every living economist. He said that “...the ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than commonly understood. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist….. I am sure that the power of vested interests is vastly exaggerated compared with the gradual encroachment of ideas.”

At the time, Keynes was railing against the economic folly of the 1920’s, which led Britain, faced with near bankruptcy after the Great War, to support severe spending cuts (known as the Geddes Axe), and a return to the Gold Standard. The result was massive deflation, a General Strike, followed by the Depression and the end of British hegemony in the world.

The comparison between the errors of then and now is one of the messages of a splendidly fascinating book published last year by the Cambridge University Press, entitled Resilient Liberalism in Europe’s Political Economy, in which a group of 15 political and social scientists dissect the origins and astounding endurance of neo-liberal ideas in Europe and the United States. The editors are Vivien Schmidt of Boston University and Mark Thatcher of the London School of Economics.

These ideas, now so familiar, include all of the economic platitudes of the Reagan/Thatcher era—balanced budgets, reduced public spending, privatization, free markets and deregulation. What is relatively new is the obsession with austerity. This, of course, arrived as a result of the 2008 Great Recession, which left all the world’s large and small economies with an extraordinary accumulation of debt.

It is worth noting that during the nineteenth century, British national debt, following the Napoleonic Wars, stood at 250 percent of GDP and stayed above 100 percent throughout the century. Today’s obsession with debt reduction would have bemused the economists of that time. Greece with some 170 percent deficit to GDP would be average.

The great debate now centers on deficits: how to reduce them while supporting growth at the same time—whether to embrace austerity or not. Germany brings to the argument all the economic banalities of the past, from Weimar Republic inflation in the 1920’s, through the Depression to the Marshall Plan-financed rebuilding of Europe after the Second World War. Germany draws from them the conventions of the German housefrau, stable money and balanced budgets.

The Schmidt and Thatcher-edited book notes that German neo-liberalism differs from the Anglo-American variety in that it retains a more social democratic bias and supports more regulation and strong but decentralized welfare government.

In building today’s European Union, the price of Germany’s signing the 1998 Maastricht Treaty was a set of rules now tying all 28 countries to the doctrine of austerity that requires deficits to be kept at or below 3 percent.

The Treaty has since been reinforced by two German-sponsored agreements, the Stability and Growth pact, and more recently another pact introducing further budget restrictions so draconian that both Britain and the Czech Republic refused to sign.

Boston University Professor Cathie Jo Martin concludes in one of her contributions to the cited book that “the strain of living with these rules will be too great. The attempt to create this technocratic economic government will either be given up or a more far-reaching integration will be necessary.” This would suit Angela Merkel, as her solution to the problem has always been “more Europe”.

This brings us back to France. If by some political blessing Prime Minister Valls cannot form a new government committed to President Holland’s version of German austerity (we will know by the time these words are read) the National Assembly may be dissolved and new elections called.

Electoral hostility to austerity might compel a new French government to defy Germany’s economic diktat.  While Chancellor Merkel continues to demand still more discipline, last weekend at Jackson Hole, the head of the European Central Bank, Mario Draghi, struck a more conciliatory note and softened his tone on fiscal rules. What he was most concerned about was unemployment and deflation in Europe. That is what also concerns the French voter.


Visit William Pfaff’s website for more on his latest book, “The Irony of Manifest Destiny: The Tragedy of America’s Foreign Policy” (Walker & Co., $25), at www.williampfaff.com.

© 2014 Tribune Media Services, Inc.


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