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Editorial: Europe needs both austerity and growth

Germany is the problem – but not because it insists on fiscal discipline

May Day – that traditional celebration of the international labour movement – had a strong anti-austerity twist in Europe yesterday.

Seemingly endless recession and truly catastrophic levels of unemployment are fostering distrust, despair and a rise in political extremism. Government cuts at the behest of the hated “troika” (for which, read Germany) are – according to many – unequivocally to blame.

Nor are ordinary citizens the only ones growing fretful at so much pain with no discernible gain. Fuelled by the revelation that the seminal academic research making the economic case for austerity was flawed, policymakers, and even some investors, are questioning the wisdom of the focus on cuts.

The new Italian Prime Minister, the President of the European Commission and a high-profile bond-fund manager are only the latest to add their voices to the chorus. And the German Chancellor – naturally opposed to profligacy and facing an election – is looking increasingly exposed. Nor is her most important ally much help. While François Hollande does not seem to be able to make up his mind, his advisers – according to a draft report leaked to the press last week – accuse Angela Merkel of displaying “egotistical intransigence” and considering nothing but her citizens’ savings, her country’s trade balance and her own looming vote.

With opposition on all sides – social, political and economic – is it time for a rethink of austerity? Yes and no.

First, the no. The most obvious reason is a practical one. The bargain between the struggling periphery and the stronger core is that the latter will bail out the former in return for assurances that it is not pouring good money after bad; if Greece et al renege on their promises, the deal will be off.

But there is a wider point here, too. The notion that, without austerity, Europe would be in rude health overlooks the lesson of the financial crisis: debt-fuelled growth is illusory and cannot continue indefinitely. Indeed, spending cuts were only ever one side of the coin. According to the theory, while spending cuts brought down unsustainable debts, a shake-up of labour markets, tax regimes and the like would secure the longer-term recovery. In practice, however, reform is patchy at best.

In fact, Ms Merkel has shown more flexibility than she is given credit for. Greece, Spain and France have all been given more time to meet their budget-deficit targets. It is also woefully simplistic to dismiss Germany’s domestic political concerns – both because German voters will bear the brunt of the bailout costs, and because, as the recent launch of the anti-euro Alternative für Deutschland party suggests, the departure of a Greece or an Italy is not the only risk the single currency faces.

Germany remains the problem, though. And it is here that the need for a new approach to austerity comes in. Not because Berlin insists on fiscal discipline from others, rather because it is needlessly pursuing the policy itself. True, the powerhouse German economy is now suffering and may even be in recession. But with record-low borrowing rates and a budget heading for balance, Berlin can easily afford a stimulus – and a boost to demand in Germany would be a swift fillip elsewhere.

Where the anti-austerians are right is that it is vital to get the eurozone growing again. That means the European Central Bank cutting interest rates at today’s meeting, and it means Germany taking its foot off the brake. The choice between austerity and growth is a false one. Europe needs both. The mistake is in thinking that they need come from the same place.