E.U. Leaders Set to Admit Austerity Is Not Enough
Bowing to mounting evidence that austerity alone cannot solve the debt crisis, European leaders are expected to conclude this week that what the debt-laden, sclerotic countries of the Continent need are a dose of economic growth.
A draft of the European Union summit meeting communiqué calls for ”growth-friendly consolidation and job-friendly growth,” an indication that European leaders have come to realize that austerity measures, like those being put in countries like Greece and Italy, risk stoking a recession and plunging fragile economies into a downward spiral.
The difficulty, however, is that reaching such a conclusion is not the same as making it happen.
Instead, leaders will discuss long-term structural reforms and better use of E.U. subsidies, while avoiding mention of the one thing that could change the climate: a fiscal stimulus from Germany, the euro currency zone’s undisputed powerhouse.
Then the summit meeting, which is to be held in Brussels and be greeted by a national strike in Belgium, will try to satisfy Berlin’s desire for fiscal discipline by wrapping up talks on a new intergovernmental treaty.
With its emphasis on punishing euro nations that exceed deficit and debt level, the agreement, or “fiscal compact,” has been described privately by one official as a plan to criminalize Keynesianism.
Nevertheless, the hope is that if it gets the treaty it wants on fiscal discipline, Germany will agree to far-reaching efforts to end the debt crisis.
And while some see the new, pro-growth rhetoric as empty — or even cynical — others believe that it marks a psychological turning point.
“I think it is an important shift, particularly from Germany but also from others, from the phase where it was all about fiscal balance and consolidation to a more comprehensive approach where you have an all-encompassing look at economic sustainability,” said Nicolas Véron, senior fellow at Bruegel, an economic research institute in Brussels. “It is quite promising, but at this point I don’t see it translating into immediate measures.”
Those are badly needed in a Europe with more than 23 million people unemployed. Indeed, the lack of growth was highlighted by Standard & Poor’s this month when it downgraded several euro zone nations, including France.
“We believe that a reform process based on a pillar of fiscal austerity alone risks becoming self-defeating, as domestic demand falls in line with consumers’ rising concerns about job security and disposable incomes, eroding national tax revenues,” S.&P. said.
Other analysts concur, and some highlight the need for those few nations with room to maneuver to stimulate demand.
“Even countries with relatively strong public finances such as Germany — the country’s budget deficit fell to just 1 percent of GDP in 2011 — are tightening fiscal policy,” Simon Tilford, the chief economist for the Center for European Reform in London, wrote recently. “In so doing, European governments are standing conventional macroeconomic thinking on its head. Governments are withdrawing demand from their economies at a time of pronounced private sector weakness.”
Output in both the euro zone and the European Union is still around 2 percent lower than before the crisis.
