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Policy Analysis: How Austerity Failed Europe

Since 2008, conservative policymakers have prescribed austerity as a panacea to the beleaguered economies of Europe. Wolfgang Schäuble, German Minister of Finance, has largely been the face of the greater Eurozone push for austerity, writing up an op-ed in the Financial Times justifying its merits. 

Former UK Prime Minister David Cameron described it as ensuring “sound finances” in an effort to save “money today that you might need tomorrow.” The Union for a Popular Movement Party of France (UMP; renamed in 2015 as “The Republicans”) under former President Nicolas Sarkozy signed off numerous austerity measures while in power.

Eurozone members struggling with large debt-to-GDP ratios, most notably Greece, were effectively forced into jumping aboard the austerity train as well.

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What was the result? Utter disaster. In France, austerity policies were so detested that the UMP lost the 2012 elections to the Socialists, who largely ran against it (never mind the fact that the elected President, Francois Hollande, adopted an austerity agenda two years into office, one of the drivers of his astoundingly dismal 4% approval rating).

In the United Kingdom, now led by Prime Minister Theresa May, austerity has been so despised that her country has gone from confidently being declared a one-party state to the Conservatives losing their Parliamentary majority in this year’s elections. The backlash has paid handsomely for Labour Party Leader Jeremy Corbyn, who has brought his party’s agenda back to its social democratic roots for the first time in decades.

The Troika (IMF, European Commission, and European Central Bank)’s coerced imposition of austerity in Greece has been so disastrous that they’ve easily replaced playwrights Aeschylus, Euripides, and Sophocles as the most famed creators of Greek tragedy. They’ve needed three bailouts, weathered an economic contraction of over 20%, and endured the humiliation of becoming the first-ever country to be demoted from developed nation to emerging market status. Moreover, the anger toward austerity has been a pivotal driver of the rise of far-right nationalist parties. For example, French National Front leader Marine Le Pen drastically improved the performance of her party by garnering the support of young voters, a demographic that has seen their unemployment rates swell from austerity programs.

Austerity has even jeopardized the state of the post-war Western ideal of greater economic, political, and social integration as millions of Europeans turn their economic disenchantment into outrage toward international institutions like the EU, IMF, and World Bank, all of which through their endorsement of neoliberal economics have continued to prescribe more and more austerity, foolishly thinking it will cure their pain. At the end of the day, “austerian” economic policy appears to be tearing apart the continent.

For example, French National Front leader Marine Le Pen drastically improved the performance of her party by garnering the support of young voters, a demographic that has seen their unemployment rates swell from austerity programs. Austerity has even jeopardized the state of the post-war Western ideal of greater economic, political, and social integration as millions of Europeans turn their economic disenchantment into outrage toward international institutions like the EU, IMF, and World Bank, all of which through their endorsement of neoliberal economics have continued to prescribe more and more austerity, foolishly thinking it will cure their pain. At the end of the day, “austerian” economic policy appears to be tearing apart the continent.

So what is austerity, and why has it produced such dismal results? The answer to these questions requires a return to the economic collapse in 2008, as, without it, there would be no crisis for conservative policymakers to “fix” with austerity programs. In the early days of the crisis, Western economies actually responded with some kind of stimulus – a program in which the government seeks to combat economic recession by increasing national expenditures while cutting taxes.

The general rationale behind this was based on two pillars. First, interest rates across the entire Western world were either at or near zero, making it near impossible to use monetary policy to cure the economy. The essential logic behind this is that when national financial institutions like the European Central Bank and the Bank of England reduce the interest rates on money they loan out, it results in a reduction of borrowing costs. As a result, private businesses and consumers would be encouraged to borrow and invest more, whether it is used for housing, factories, and other forms of capital. By increasing their spending, they would be able to combat a recession, which by definition leads to consumers and businesses to invest way less into the economy (in a crisis, you’re more likely to save your money fearful you will lose it all).

As that was clearly not an option, policymakers went toward a stimulus package. The federal government would boost its own spending in the government, including in infrastructure, education, and energy. This investment would be used to combat the shortfall of spending that is seen in a recession.

Moreover, tax cuts would be used to give families and businesses more money so that they could hopefully spend some of it. Before long, we saw the US$831 billion American Recovery and Reinvestment Act in the United States, the €200 billion European Economic Recovery Plan across the European Union, a US$30 billion stimulus package in the United Kingdom, a €50 billion stimulus in Germany, and plenty of other fiscal expansions.

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By fall 2009, however, we began to see a surge in right-wing economists becoming fearful of the massive increases in deficits they were seeing in Western budgets. As a result, they called for an end to stimulus and a shift toward austerity – an economic program focused on deficit reduction, completed by reducing spending and raising taxes.

By cutting deficits, they hoped to increase businesses’ confidence in the economy. International institutions like the World Bank, European Central Bank, and International Monetary Fund, both of which had seen their ranks grow with neoliberal economists since the 1980s, began to join their calls. By late 2010, almost every European government had ended stimulus programs in favor of austerity.

But why did this happen? It’s worth noting that Keynesian stimulus programs have plenty of enemies. For one, right-wingers love to hate them. Remember, stimulus requires an increase of spending and budget deficits, both of which are in complete opposition to conservative agendas. Austerity programs, with their mandatory spending reductions, are very useful in creating public support toward cutting government benefits (a core conservative goal). The problem, however, is that there is very little public backing for this (see the US attempt to cut back on insurance subsidies and single-payer insurance for the poor or the UK’s public sector pay freeze), meaning that austerity practically provided a once-in-a-lifetime opportunity to secure spending cuts.

Moreover, because most voters believe that government spending operates similarly to their own budgets, it’s easy for politicians to decry increases in government spending as “reckless” or “dangerous”, or in former Prime Minister David Cameron’s case, “selfish.” It’s not their fault – it’s easy to think that there is a finite limit to how much the government can spend. Yet that’s not the case at all.

Most Western governments can actually borrow almost infinitely at extremely low rates (in July 2016, the 10-year German bond rate was -0.15%!), and countries that borrow in their own currencies (like the United Kingdom) can never run out of money because they can simply print it (within reason). Yet the negative image of stimulus creating dangerous levels of spending worked (and still does).

US President Barack Obama counted cutting the deficit by two-thirds as one of his novel accomplishments. The very first page of the Labour Party’s 2015 Manifesto declared that the first line of their first budget would be “this budget cuts the deficit every year.” Syriza, a Greek party vehemently opposed to austerity, ended up signing a bailout deal that mandated it. It also didn’t help that in many countries, left-wing parties were in power as the economic crisis was raging, making it easier for conservatives to blame them and their policies for the financial crisis.

When even the left is fighting upon the right’s terms for economic policy, it’s clear what would win out. Even when combined with support from just about every international economic institution (e.g. IMF, World Bank, ECB), however, this force paled in comparison to the woes of one nation: Greece.

Greece was one of the greatest blessings for conservative messaging. As a nation which had been hiding its budget deficits until former Prime Minister George A. Papandreou found out about it, Greece was plagued by a national culture of tax evasion. Since Greece also had no ability to print its own money (it uses the Euro, which is controlled by the European Central Bank), it increasingly found itself needing “bailouts” from the Troika (IMF, World Bank, ECB).

The quotation marks are telling – these “bailouts” were nothing more than short-term payment relief for Greece, as while the Troika paid off Greece’s debts to private creditors, the government still needed to pay that amount to them. They were also required to implement austerity. The key here, however, was that the entire fiscal crisis Greece was experiencing was “proof” of what would occur if spending was left out of control. By associating stimulus programs with causing these types of situations, voters were misled to go against them. And so stimulus programs, which were beginning to work but hadn’t reached their full potential, came to a halt.

In countries that implemented austerity, disaster struck. This was exactly what happened in the 1980s when austerity was implemented in the Third World (and why South America hates the IMF and World Bank). See, once spending cuts are implemented, a government ends up investing less money into the economy. Less investment equals lower growth, meaning that the economy contracts as a result.

A smaller economy means fewer taxes can be collected, which can yield several different impacts depending on the economy. In some austerity programs, taxes are also hiked, meaning that the deficit is reduced, but your economy is still as a whole weaker. In others, greater tax revenue isn’t collected (either there is a conservative push against any increases or pervasive tax evasion), which means that your debt hasn’t meaningfully changed (could be higher or lower depending on interest payments or the amount of money focused on deficit reduction), but your debt-to-GDP ratio has gone up because of a contraction.

Even though John Maynard Keynes theorized that a one-time cooling of fiscal policy would only lead to a one-time weakening of the economy, repeated austerity programs make this effect worse.

Unemployment goes up as the government cuts its spending (both as a result of them getting rid of public sector jobs and businesses feeling less confident in investing since nobody else is), which contributes to the horrific youth unemployment rates in European economies today (9 European nations today have youth unemployment rates higher than 20%, with Italy at 37%, Spain at 38.6%, and Greece at 46.6%.

Even the Eurozone average is at 18.9%). Looking at this and it’s no surprise the young are most likely to buy into far-right populist agendas. Marine Le Pen, whose home nation of France had a 21.6% unemployment rate, had no trouble getting the support of millions of disaffected French youth by promising the government’s help in getting them jobs. Now that the center-left has joined conservatives in increasingly abandoning fiscal expansion and government assistance in reducing unemployment, the far right – which, in their hatred of austerity and promises of providing jobs – is paradoxically the most economically progressive.

We’ve already seen how Francois Hollande’s center-left administration implemented austerity measures, but there’s more: the center-left German Social Democratic Party (who is currently in coalition with the center-right Christian Democratic Union and Christian Social Union) also supports it. It’s actually not at all surprising that the center-left is having so much trouble winning elections – they’ve effectively signed away their base to what is considered the “far left” (think Jeremy Corbyn and Jean-Luc Melenchon) and the “far right.”

Remember Jeremy Corbyn-led Labour’s shock gains in seats? What about Bernie Sanders’ status as the most popular politician in the United States? Both of them, considered part of the “far left” (never mind the fact that our political fulcrum has shifted so much since the 1980s that both of them are around the norm for social democratic parties from 1930 to 1970), gain their popularity away from disaffected members that used to vote reliably for center-left parties. In the 2017 French election, the center-left garnered just 6.36% of the vote, shedding their support almost entirely to the far left and the far right.

Austerity is harmful to health too. Remember all those public spending cuts? Almost every European democracy currently has a universal health care system, ranging anywhere from the government paying most of the health bills to controlling the entire sector.

In 2013, David Stuckler, a leading expert on health economics (with masters in public health from Yale and a PhD from Cambridge), and Sanjay Basu, an assistant professor of medicine and epidemiologist at Stanford University, found that in Europe and North America, austerity program implementation was linked to over 10,000 additional suicides and a million additional cases of depression.

Greece is one of the most, but also serves to show the horrors of when austerity is rammed through: with public health spending dropping by more than 40%, and a 60% rise in “economic” suicides (from one of the lowest in Europe to one of the highest).

By contrast, if this entire experiment was just avoided, and stimulus programs were implemented normally, we could see something similar to the 1930s New Deal in the US – where every $100 per capita led to 20 fewer deaths per 1,000 births, 4 fewer suicides per 100,000 people, and 18 fewer pneumonia deaths per 100,000 people.

Obviously, deficit spending shouldn’t continue forever. Spending cuts, just like interest rate hikes, should be used when the economy is doing well. During a boom, it’s always important to stay prepared for the next downturn (which will likely result in more deficit spending), so budget balancing is useful there.

These policies, however, should never be used in weak economies, which simply don’t have the strength to deal with the economic cooling associated with austerity. The recession might be “over”, but for millions of millennials, it’s still very real – especially since a substantial segment of them remains ignored by cost-cutting austerity programs.

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