The age of austerity is over. Why? It doesn’t work

If ever George Osborne wanted an excuse to embrace Plan B this is the moment


The age of austerity is coming to an end.

Admittedly, the news hasn’t yet crossed the English Channel and reached Mr Osborne, the Chancellor of the Exchequer. But the striking fact is that the member countries of the eurozone have ceased trying to meet the demanding targets for reductions in their budget deficits that have been set for them. They are asking Brussels for easier debt-reduction programmes and they are being granted them.

Recently, Greece, for instance, was given an extra two years to reduce its deficit below 3 per cent of Gross Domestic Product (GDP). Then, when the bailout inspectors representing the European Commission, the International Monetary Fund and the European Central Bank visited Lisbon last month, they gave Portugal an extra year – until 2015 – to get its accounts in order. A troika official said: “There’s a great adjustment effort, which is being recognised. There is a consensus [among the lenders] that the external setting has worsened and that Portugal needs another year to lower the deficit below 3 per cent.”

Spain was given a pass this year and is expected to get a further waiver. Indeed, tomorrow, Spain is expected to announce that it is to soften its austerity programme in favour of a new focus on structural reforms. The Government hopes that it will now be given until 2016 to bring its budget deficit below 3 per cent of GDP. This would allow it to put more emphasis on preparing the conditions for long-term growth.

France is perhaps the most interesting case. President Hollande is insouciant about the country’s high levels of debt. In a speech given to the Organisation for Economic Cooperation and Development (OECD) last week, he said that the solution to the crisis was not austerity. Instead, it was “credibility, sustainability and stability”. So, true to his word, Mr Hollande said that reaching the 3 per cent target would be postponed by a year. Take it or leave it.

What, though, does the German Chancellor, Angela Merkel, think about this? She is beginning to dislike the very word austerity. “I call it balancing the budget,” she told an audience at a book launch. “Everyone else is using this term austerity. That makes it sound like something truly evil.” Moreover, she is not opposing requests for an easing of the paths to solvency. Last week, she told reporters that she felt debt in the eurozone was still too high but added that that was not good “in the long run”.

At the same time, José Manuel Barroso, the President of the European Commission, commented earlier this week that while austerity “is fundamentally right, I think it has reached its limits in many aspects… to be successful [a policy] not only has to be properly designed. It has to have the minimum of political and social support.” When the President of the European Commission says that austerity has reached its limits, then something profound has changed. The street protests in weaker eurozone countries have made a difference.

Nonetheless, the main reason why the case for austerity is no longer convincing is that it hasn’t worked. It has not reduced borrowing. UK government borrowing is likely to come out at £120bn this year, exactly where it’s been for the previous two years. The picture is worse still on the Continent, where new data shows debt in many struggling eurozone countries is actually continuing to climb despite unprecedented budget cuts and tax increases. Irish, Spanish and Portuguese debt levels all hit euro-era highs last year. Overall, eurozone sovereign debt rose to 90.6 per cent of GDP last year, the highest on record. The UK has a debt ratio of 86.5 per cent.

These figures are significant because part of the case for austerity was the notion that countries with a debt exceeding 90 per cent of their annual GDP experienced much slower growth than countries with lower ratios. This was the conclusion of a paper published in 2010 by the Harvard economists, Professors Carmen Reinhart and Kenneth Rogoff. This piece of work was immensely influential. However, it turns out to have been based in part on spreadsheet errors in the use of available data. Their embarrassment has further undermined the case for austerity.

Finally, there was also a consideration which obviously weighed heavily with Mr Osborne and that now also appears dubious. This was the attitude of international investors towards the debt issued by the British Government. Surely they would shun it if there were no credible deficit programme in place? The consequence would be higher interest rates with ruinous results. But, this week, the man who runs the world’s largest bond fund, Bill Gross, said that the UK and almost all of Europe have erred in terms of believing that “austerity, fiscal austerity in the short term, is the way to produce real growth. It is not. Bond investors want growth much like equity investors.”

So there we have it. Austerity hasn’t produced the desired results. Its intellectual under-pinning has been weakened. Bondholders aren’t impressed. Eurozone countries are weakening its disciplines. If Mr Osborne wants an excuse to embrace Plan B, this is the moment. Everybody else is doing it.

React Now

Latest stories from i100
Have you tried new the Independent Digital Edition apps?
iJobs Job Widget
iJobs General

Cover Supervisor

£75 - £90 per day + negotiable: Randstad Education Group: Are you a cover supe...

Marketing Manager - Leicestershire - £35,000

£30000 - £35000 per annum: Ashdown Group: Marketing Manager (CIM, B2B, MS Offi...

Marketing Executive (B2B and B2C) - Rugby, Warwickshire

£22000 - £25000 per annum: Ashdown Group: A highly successful organisation wit...

SEN Coordinator + Teacher (SENCO)

£1 per day: Randstad Education Leeds: Job Purpose To work closely with the he...

Day In a Page

Read Next
Piper Ryan Randall leads a pro-Scottish independence rally in the suburbs of Edinburgh  

i Editor's Letter: Britain survives, but change is afoot

Oliver Duff Oliver Duff
Some believe that David Cameron is to blame for allowing Alex Salmond a referendum  

Scottish referendum: So how about the English now being given a chance to split from England?

Mark Steel
Scottish referendum: The Yes vote was the love that dared speak its name, but it was not to be

Despite the result, this is the end of the status quo

Boyd Tonkin on the fall-out from the Scottish referendum
Manolo Blahnik: The high priest of heels talks flats, Englishness, and why he loves Mary Beard

Manolo Blahnik: Flats, Englishness, and Mary Beard

The shoe designer who has been dubbed 'the patron saint of the stiletto'
The Beatles biographer reveals exclusive original manuscripts of some of the best pop songs ever written

Scrambled eggs and LSD

Behind The Beatles' lyrics - thanks to Hunter Davis's original manuscript copies
'Normcore' fashion: Blending in is the new standing out in latest catwalk non-trend

'Normcore': Blending in is the new standing out

Just when fashion was in grave danger of running out of trends, it only went and invented the non-trend. Rebecca Gonsalves investigates
Dance’s new leading ladies fight back: How female vocalists are now writing their own hits

New leading ladies of dance fight back

How female vocalists are now writing their own hits
Mystery of the Ground Zero wedding photo

A shot in the dark

Mystery of the wedding photo from Ground Zero
His life, the universe and everything

His life, the universe and everything

New biography sheds light on comic genius of Douglas Adams
Save us from small screen superheroes

Save us from small screen superheroes

Shows like Agents of S.H.I.E.L.D are little more than marketing tools
Reach for the skies

Reach for the skies

From pools to football pitches, rooftop living is looking up
These are the 12 best hotel spas in the UK

12 best hotel spas in the UK

Some hotels go all out on facilities; others stand out for the sheer quality of treatments
These Iranian-controlled Shia militias used to specialise in killing American soldiers. Now they are fighting Isis, backed up by US airstrikes

Widespread fear of Isis is producing strange bedfellows

Iranian-controlled Shia militias that used to kill American soldiers are now fighting Isis, helped by US airstrikes
Topshop goes part Athena poster, part last spring Prada

Topshop goes part Athena poster, part last spring Prada

Shoppers don't come to Topshop for the unique
How to make a Lego masterpiece

How to make a Lego masterpiece

Toy breaks out of the nursery and heads for the gallery
Meet the ‘Endies’ – city dwellers who are too poor to have fun

Meet the ‘Endies’ – city dwellers who are too poor to have fun

Urbanites are cursed with an acronym pointing to Employed but No Disposable Income or Savings
Paisley’s decision to make peace with IRA enemies might remind the Arabs of Sadat

Ian Paisley’s decision to make peace with his IRA enemies

His Save Ulster from Sodomy campaign would surely have been supported by many a Sunni imam