Paul Vallely: Greek lessons that Cameron really should heed

The Prime Minister's rhetoric on austerity sends one message to European leaders, but he is doing the opposite at home

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At the time it seemed quite a good gag. Greece had stopped exporting hummus and taramasalata: it was a double-dip recession. After all, Greece was a far-off part of Europe, just 2 per cent of its economy and still redolent of those mildly comic Ruritanian generals.

A year on it doesn't seem that funny. Some 70 per cent of Greeks have just voted for parties that reject the €174bn (£141bn) international bailout offered to Athens. The country is on the brink of chaos. The consequences for the euro and for non-eurozone neighbours, such as us, alarmingly unpredictable.

Things are bad. Unemployment has trebled. More than half of people under 25 are jobless. Public servants have had 30 per cent pay-cuts. Even the middle classes are struggling to survive. Infants are being abandoned on doorsteps. Suicides are soaring. Its economy will be uncompetitive and depressed for years – or even decades.

If it pulls out of the euro after its elections on 17 June there will be runs on the banks, collapsing public services, unpaid policemen, looting and rioting and perhaps grave civil unrest.

But it is not just the Greeks. Voters across Europe are rejecting the new austerity policies as ordinary people object to paying the price for a disaster caused by greedy bankers, incompetent regulators and a complacent political elite.

The French have just elected a new president, François Hollande, who ran on a platform of shifting focus from austerity to growth. In Germany, the party of Angela Merkel, the high-priestess of austerity, has just been battered by its worst results in local elections since 1945. In the UK, the two parties of the cuts-obsessed coalition took a thrashing in local council polls. Likewise in Italy. Opinion polls suggest the same thing is about to happen in Holland.

"Austerity is over," said Takis Pavlopoulos, a senior figure in the successful anti-cuts party in Greece. "You have to be a neo-liberal fanatic not to see that it has failed."

President Barack Obama has been pushing a softer version of the same line to Europe's leaders this weekend. The United States has taken a very different approach after the 2008 global financial fiasco. Early that year, President George Bush reacted quickly bringing in a $158bn (£100bn) financial stimulus to foster growth. Then Obama, within days of his inauguration, introduced an enormous $787bn stimulus package as the US was teetering into a depression.

Soon after, the US economy made a strong recovery, growing by 3.8 per cent in the third quarter of that year and 3.9 per cent in the next. Economic demand is rising by 1.9 per cent so far this year. By contrast, in austerity-gripped Europe, demand is set to fall by 0.2 per cent. That is why Obama is putting pressure on Angela Merkel to shift her hawkish emphasis from budgetary discipline to boosting growth. Without it, he fears the world will be plunged into a second recession in four years which would leave permanent scars, jeopardising America's fragile recovery – and his own re-election chances.

The US President finds a natural ally for these expansionary policies in François Hollande and the Italian Prime Minister, Mario Monti, who think government borrowing can be justified for investment, though not for current spending. Even the British Prime Minister, David Cameron, has joined the pressure on Mrs Merkel, telling the German Chancellor, whose economy is still growing strongly, that she should use her country's wealth to shore up the euro to avoid a single currency implosion.

He has also been doing a bit of nimble footwork to build bridges with the new French president, whom he snubbed during the French election campaign, by suggesting, bizarrely, that there is no contradiction between policies aimed at cutting the deficit and those designed to stimulate economic growth.

That is not a balance he is striking back home. Here, public spending cuts have been so severe that, despite Chancellor George Osborne's confident forecast of 2.5 per cent growth, our economy has slipped into the double-dip recession that the eurozone has avoided.

Contrary to the prime ministerial rhetoric, no serious attempt has been made to balance fiscal rectitude with the promotion of growth, along the lines suggested by last week's plan from Labour's Ed Balls and Lord Mandelson.

The truth is that you cannot cut and tax your way out of a recession. The Osborne strategy has pushed unemployment above 2.6 million. That slashes the amount taken in taxes by £15bn and increases the benefits bill by £10bn. The economy has stagnated for two years. This coalition-created slump is now longer than the Great Depression – with no end in sight.

There is an alternative, as Jonathan Portes, the director of the respected National Institute of Economic and Social Research, spelled out last week. "With long-term government borrowing as cheap as in living memory," he wrote, "with unemployed workers and plenty of spare capacity, and with the UK suffering from both creaking infrastructure and a chronic lack of housing supply, now is the time for government to borrow and invest. This is not just basic macro-economics; it is common sense."

With interest rates at virtually zero, the government can borrow money for almost nothing. Yet spending on roads, schools and hospitals has been cut by about half over the past three years, and will be cut even further over the next two. Portes recommends borrowing for a £30bn infrastructure investment programme which would create hundreds of thousands of jobs at less cost than will be raised by the tax on pasties. David Cameron should now do at home what he is recommending abroad. The laddie should be for turning.

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