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.

React Now

Latest stories from i100
iJobs Job Widget
iJobs General

Recruitment Genius: Project Implementation Executive

£18000 - £23000 per annum: Recruitment Genius: They work with major vehicle ma...

Recruitment Genius: Chiropractic Assistant

£16500 per annum: Recruitment Genius: A Chiropractic Assistant is needed in a ...

Recruitment Genius: Digital Account Executive - Midlands

£18000 - £26000 per annum: Recruitment Genius: They work with major vehicle ma...

Recruitment Genius: Web Developer

£28000 - £30000 per annum: Recruitment Genius: This company provides coaching ...

Day In a Page

Read Next

Errors & Omissions: how to spell BBQ and other linguistic irregularities

Guy Keleny

South Africa's race problem is less between black and white than between poor blacks and immigrants from sub-Saharan Africa

John Carlin
NHS struggling to monitor the safety and efficacy of its services outsourced to private providers

Who's monitoring the outsourced NHS services?

A report finds that private firms are not being properly assessed for their quality of care
Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

Zac Goldsmith: 'I'll trigger a by-election over Heathrow'

The Tory MP said he did not want to stand again unless his party's manifesto ruled out a third runway. But he's doing so. Watch this space
How do Greek voters feel about Syriza's backtracking on its anti-austerity pledge?

How do Greeks feel about Syriza?

Five voters from different backgrounds tell us what they expect from Syriza's charismatic leader Alexis Tsipras
From Iraq to Libya and Syria: The wars that come back to haunt us

The wars that come back to haunt us

David Cameron should not escape blame for his role in conflicts that are still raging, argues Patrick Cockburn
Sam Baker and Lauren Laverne: Too busy to surf? Head to The Pool

Too busy to surf? Head to The Pool

A new website is trying to declutter the internet to help busy women. Holly Williams meets the founders
Heston Blumenthal to cook up a spice odyssey for British astronaut manning the International Space Station

UK's Major Tum to blast off on a spice odyssey

Nothing but the best for British astronaut as chef Heston Blumenthal cooks up his rations
John Harrison's 'longitude' clock sets new record - 300 years on

‘Longitude’ clock sets new record - 300 years on

Greenwich horologists celebrate as it keeps to within a second of real time over a 100-day test
Fears in the US of being outgunned in the vital propaganda wars by Russia, China - and even Isis - have prompted a rethink on overseas broadcasters

Let the propaganda wars begin - again

'Accurate, objective, comprehensive': that was Voice of America's creed, but now its masters want it to promote US policy, reports Rupert Cornwell
Why Japan's incredible long-distance runners will never win the London Marathon

Japan's incredible long-distance runners

Every year, Japanese long-distance runners post some of the world's fastest times – yet, come next weekend, not a single elite competitor from the country will be at the London Marathon
Why does Tom Drury remain the greatest writer you've never heard of?

Tom Drury: The quiet American

His debut was considered one of the finest novels of the past 50 years, and he is every bit the equal of his contemporaries, Jonathan Franzen, Dave Eggers and David Foster Wallace
You should judge a person by how they peel a potato

You should judge a person by how they peel a potato

Dave Hax's domestic tips are reminiscent of George Orwell's tea routine. The world might need revolution, but we like to sweat the small stuff, says DJ Taylor
Beige is back: The drab car colours of the 1970s are proving popular again

Beige to the future

Flares and flounce are back on catwalks but a revival in ’70s car paintjobs was a stack-heeled step too far – until now
Bill Granger recipes: Our chef's dishes highlight the delicate essence of fresh cheeses

Bill Granger cooks with fresh cheeses

More delicate on the palate, milder, fresh cheeses can also be kinder to the waistline
Aston Villa vs Liverpool: 'This FA Cup run has been wonderful,' says veteran Shay Given

Shay Given: 'This FA Cup run has been wonderful'

The Villa keeper has been overlooked for a long time and has unhappy memories of the national stadium – but he is savouring his chance to play at Wembley
Timeless drama of Championship race in league of its own - Michael Calvin

Michael Calvin's Last Word

Timeless drama of Championship race in league of its own