InfoBox: Arguments For and Against Tougher Austerity

AGAINST Tougher Austerity

1 – DOWNWARD SPIRAL

Austerity cannot be applied in a recession without triggering a downward growth spiral. Now is the time to stimulate the economy, because growth is the only way to provide a sustainable exit from the slump. If you impose public sector cuts while the private sector is deleveraging, where is growth going to come from? The priority for European governments should be to keep money flowing to generate the growth that’s ultimately going to be needed to pay off the debt.

2 – BABY WITH THE BATHWATER

The current levels of austerity being imposed on Greece, Portugal and Spain risk killing the patient they are designed to cure. The Greek economy has shrunk a total of 18 percent over the past five years, with no sign of recovery. In Portugal, the best and brightest young minds are fleeing to seek jobs in Brazil, Angola or Mozambique. In times of grave crisis, you need a flexible, imaginative response not the stubborn application of economic orthodoxy.

3 – PLENTY OF ALTERNATIVES

It’s nonsense to insist austerity is the only alternative. If Germany had shown solidarity at the start of the crisis by agreeing to mutualise Greek debt, the crisis could have been snuffed out in weeks. Even at this late stage, eurobonds could still be an effective solution. So could a devaluation of the euro which remains far too strong against the dollar. That would give everybody a boost – including German exporters. Germany should also look to its history: post-WWII, the Marshall Plan stimulus was the foundation for decades of prosperity; post-WWI, the economic hardship imposed from Versailles led to catastrophe.

4 – REBELLION

Austerity is destroying the social fabric of southern European nations. It hits hardest against the poor who played no role in causing the crisis, while bankers, property speculators and politicians get away scot free; small wonder that people are taking to the streets. Without a relaxation of the endless belt-tightening, the current wave of protest could get out of hand. Political extremists will be the biggest beneficiaries.

FOR Tougher Austerity

1 – NO PAIN NO GAIN

If you don’t pay for your mistakes, you don’t learn from them. It’s a painful lesson, but Greece, Portugal and the rest need to go through it. If not, they will soon fall back into their bad habits, confident that their prudent northern neighbours will bail them out.

2 – WHAT DOESN’T KILL YOU MAKES YOU STRONGER

Austerity will leave European economies leaner, meaner and more competitive. Euro-zone nations need shock treatment to ensure they can hold their own in the globalized economy. It’s their failure to swallow the economic medicine that has left the likes of Portugal and Italy with a decade of stagnant growth. From Mexico in the 1980s to the Baltic States right now, history is full of examples of how austerity can be the spark for sustainable recovery.

3 – FREE LUNCH

In a currency union you have to play by the rules. The only alternative to austerity is asking the hard-working taxpayers of Germany, the Netherlands and other fiscally responsibility countries to fork out for a feckless southern spending spree. That is morally wrong and it would have grave political consequences in Europe, turning northern voters towards anti-European popularists. It’s already happening in the Netherlands and Finland.

4 – AUSTERITY = RECOVERY

There can be no real recovery unless nations get their public finances in order. You simply can’t spend your way out of a recession. Even in normal circumstances that’s a recipe for inflation and instability. Within the euro-zone it would place untenable strains on the currency union. Markets will only be reassured by credible, long-term plans to cut deficits and debt. Only then can sustainable growth resume.