The Occupy movement was out in full force in Frankfurt again last week. From an impromptu camp near the city‘s exhibition centre, a sizeable and surprisingly well-organised crowd embarked on two days of protest and disruption around Germany’s financial capital.
‘Cut one’s coat to suit one’s cloth’. This is the sort of kitchen-table budgetary advice that is often doled out to those who find themselves in a financial bind. When it comes to a debate about the wisdom or otherwise of austerity of the kind currently practised in peripheral Europe, it seems odd that serious economic commentators should propose such a prescription.
‘Draghi disappoints markets’ is the headline on many front pages today. Yet, if we were to go back one year – or even one month – we would recognise the ECB’s position today is light-years away from where it was then. The Bank has just announced its willingness to buy short-dated paper from crisis-struck countries in a volume adequate to achieve its goals (in other words, ‘unlimited’). It is the pre-conditions attached to this help that markets found so distasteful: the beneficiary countries must first apply for a formal bailout to the eurozone rescue vehicles, EFSF/ESM.
The Bloomberg anchor-woman was to blame. She started it. Right at the outset of a TV interview with a Global Head of Economic Strategy, she decided to limit the scope of the discussion about the world’s ills to one region: Europe. She then further sub-divided the Europe issue into a simple question: “Will Greece exit the eurozone or not?” It was almost as if this binary yardstick could adequately measure the goodness or otherwise of future outcomes for investors or for viewers in general.
That mothers multi-task, manage households with meagre budgets, and are concerned about providing adequate guidance to their kids, is well-known. But when a survey of 4,000 mums confirms these realities the mother in me feels appreciated. I also felt good that the survey was called Mumdex, the name that drew me to the Financial Times article in the first place. The article revealed that 75 percent of mums surveyed in the UK were worse off than a year ago, and that 93 percent had altered their lifestyle to adjust to new economic realities. A large number of them had even resorted to loans to make ends meet.
An observation made in a study by Kenneth Rogoff and Carmen Reinhart is often cited in connection with the eurozone debt crisis: when a country’s debt burden surpasses 90 percent of its GDP, economic growth suffers. Many European nations overtook this threshold a long time ago. Even though the study has amassed a fair amount of criticism, it is undeniable that growth in Europe has been very weak. In order get the debt back down to levels where they no longer represent a threat to growth, governments have had to pull their budgetary belts ever tighter.
Do you remember green shoots? What about exit strategies, stress tests, ring-fencing? If you have a very good memory, you may even have a distant recollection of something called moral hazard. The whole history of the crisis, it seems, is one of woeful underestimation of its length, depth and, especially, its cost. Now, at the latest, it must be clear to even the lay observer that delaying a resolution (assuming that a solution exists) is only going to result in the costs going into the stratosphere.
The most vocal Greek government officials these days seem to work either in the prime minister’s office or at the finance ministry. Over the weekend, though I read some disturbing comments from the health minister. Apparently, the suicide rate in Greece will probably see an increase of some 40 percent this year. The report reminded me of the situation in Ireland two years ago when the suicide rate rose by a quarter. The country was also roiled by a debt crisis. To put it into context, more lives were lost in the Republic to suicide than to road accidents in that year.
If you ask investors this question I doubt any of them would say ‘a hundred years’ or any other figure that corresponds to reasonable long-term historical average. Chances are you won’t even hear 50 or 20 years. Most of the responses will be generously below a decade. Among the lessons we have learnt from the bubble-bust that provoked the latest crisis is that major financial upset causes more damage to public finances than we would like, is less predictable than we would like, and occurs with a greater frequency than we would like. So it worries me enormously when economists seem to suggest that governments have all the time in the world to get on with fiscal consolidation.
The outrage barely lasted a Sunday morning. Scarcely had Anne Milton, a British government minister, floated the idea of scrapping free milk for under-5s in UK nurseries, than Downing Street scrapped the idea. The Health Minister’s argument was that the scheme is very costly, some £50m annually and rising fast, and that the health benefits are unproven. Counter arguments largely consisted of the beastliness of ‘taking milk out of the mouths of infants’.
The more high-profile economists line up on one side or the other of the austerity vs. stimulus divide, the more observers are seduced into framing the entire debate along these lines. As we focus on the pros and cons of one or the other policy, all other possible solutions are squeezed out of the discussion.
The austerity vs. stimulus debate is seemingly intractable. Some well-respected economists call austerity a certain recipe for a depression; other, equally-imminent scholars see a solid fiscal base as the prerequisite for sustainable growth and are dismayed by the prospect of yet another debt-driven expansion. One thing is certain: now that austerity decisions have been made, it has become much easier to call for stimulus. If the recovery does falter, the Keynesians know they will be able to say ‘I told you so’; if it doesn’t, no-one will ask.