Five
years on from the tsunami of the Lehman’s default and subsequent recession it’s
probably a good moment to assess the relative merits of the monetary and fiscal
strategies that developed countries have deployed to reboot their economies. There have been a range of initiatives that
have been tried but the “standout” response has been austerity, which can
also be derived as a noun – austerian and there is even an antonym – Krugman!
Through
luck more than judgement Osborne’s real cut backs are only coming through now,
when the recovering economy can deal with the squeeze. The result of this happenstance is that
employment rates have been protected despite some shrinkage in the public
sector. For those in work living standards
have dropped significantly as employers have cut back on hours and bonuses, but
as disposable income is marginal we can expect a quick recovery now we are
growing again. One might also say that the
UK has done well from other people’s austerity.
Recessions and near bankruptcy in the Eurozone has allowed us to enjoy low
interest rates and massive capital in-flows that have now kick-started our
economy.
In Greece, Spain and Portugal austerity has been real and heart rending, putting millions out of
work and turning the clock back on years of economic “growth”. State sponsored austerity in Europe as
practiced in the PIIGS economies is actually the brain child of Angela
Merkel. Frau Merkel took a very dim view
of government indebtedness in stark contrast to her predecessors who, in the
early years of the Euro (1999-2003) ran large deficits to help fund
re-unification costs and to kick start Germany’s dawdling economy. Merkel
has been steadfast in her belief that economic recovery is dependent of manageable
levels of debt. This has been a relatively
easy conclusion to come to as Germany has been able to combine debt reduction
with an export boom and very low interest rates, whereas the PIIGS had to deal
with austerity, poor productivity and high interest rates – enforced on them as
a risk premium by the banks.
German Austerity |
Do these
two different tales of austerity inform us as to whether continued or even
accelerated public spending would have dealt with the recession and
indebtedness more effectively than austerity.
Paul Krugman, in his assessment (brilliantly done) of the search for
growth after the credit crunch and the role of austerity, opines that without fiscal
stimulus monetary policy alone has struggled in stabilizing shrinking economies.
He believes passionately that interest
rates alone were never going to provide sufficient stimulus to spring us from
the demand slump that followed the crash. He us “ ..but fiscal discourse went
completely off the rails, and overall we had unprecedented austerity when we
should have had stimulus. So we’ve had
an economic disaster”.
The
equation is therefore quite simple. Do
the disadvantages: shrinking demand, rising unemployment and wasted capital,
out-weigh the advantage of low interest rates, secured on that back of this
prudence, or not? Clearly low interest
rates have worked in Germany were they have enjoyed a quick rebound. In the PIIGS economies, whilst they have the
same base rate as Germany rates have been much higher and this is what has given
austerity a bad name. Austerity with
high interest rates has become a zero sum game for the un-productive highly
indebted economies, whereas it’s been a success in Germany.
Productivity
has also been a vital variable in how austerity might play out. In high productive economies employers want
to maintain their skilled and valuable workforce and will withstand lower
profits to do so. Also productive
economies tend to have more flexible employment cost structures with more
variable pay, this allows employers to reduce costs but retain staff when
demand dips. In less productive
economies employers will automatically shed staff in the short term knowing
that they can rehire easily when things pick up. Another benefit of the
productive economy is that you can expect inward investment. Economies like the UK that have been able to
attract foreign capital flows an alternative counterbalance to
austerity and a means to spring the liquidity trap; but the less productive
southern states in the Eurozone have not been so lucky.
We can
probably learn a few of things from all this:
- If you don’t control your interest rate or currency (Eurozone economies) austerity may be a bad thing
- If you have an unproductive economy with little spare capacity austerity will be a bad thing
- If you have no track record of attracting inward investment austerity will be a bad thing
- But if your Germany austerity may be wunderbar
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