All of the major European economies are spending more now on government than they did before the global financial crisis began.
Chris Berg, Institute of Public Affairs
‘Austerity’ has become something of a dirty word in Europe. In countries like Greece, public sector jobs have been slashed, retirement benefits have been curtailed, and entitlement spending has been reduced. Or so goes the conventional wisdom.
Citing data from the European Union’s statistics agency, Eurostat, Chris Berg observes that — as a proportion of economic output (Gross Domestic Product, GDP) — government spending has increased since the onset of the global financial crisis throughout Europe. A key driver of this is rising unemployment, which has meant more people drawing on the public purse. This is what economists refer to as an ‘automatic stabiliser’: without any change in policy settings, a recession will put a balanced budget into deficit as tax receipts dry up and people draw on government handouts. And in Europe’s case, despite cuts in some areas of spending (and some tax rises as well), these have been more than offset by the growth in welfare expenditure. Moreover, even if spending had held perfectly constant in nominal terms, the deterioration in European economies would by definition have seen spending as a proportion of (falling) GDP rise.
Berg concludes that ‘austerity’ is a myth — that what critics are railing against is the lack of additional discretionary spending to jolt Europe out of its malaise. Of course, the data don’t establish either way whether such stimulus would be helpful or warranted. What is does demonstrate though is that Europe’s present woes are not evidence of the perils of ‘small government’, which has become something of a bogeyman in the debate about the future of the European social model. Rather, it is the usual clamour of ‘losers’ from policy changes complaining about the adverse effects imposed on them.
Europe is far away, and unless you watch the SBS news it has an unfamiliar cast of characters and issues. But this year it will become more and more important in our lives, so it’s worth watching - and its scene is changing rapidly.
Tim Colebatch, The Age
For the most part, Australia is a spectator to global economic events. In some ways — such as the rapid rise of China — we’re beneficiaries. But in other areas, we can be knocked for six by events out of our control. The calamity presently befalling Europe is one such event. Already, fears about Greek default have seen the Australian dollar ‘slump’ — now hovering around parity with the US dollar, with expectations it could fall further. Just months ago, it was buying 1.10 US dollars.
In a primer for Australian audiences, Tim Colebatch (economics editor for The Age) summarises the current drama in Europe. Readers of this blog would be well aware of the key issues at play. The question is, what does it mean for Australia? For one thing, Treasurer Wayne Swan must be nervously watching how Greece’s politicians act. If Greece defaults on its debts, and leaves the Eurozone, there could be wide reaching ramifications for financial markets — on a par, some say, with the collapse of the US bank Lehman Brothers in 2008 that precipitated a rapid deterioration in economic conditions around the world. (Others, it must be said, believe the Greek situation has been sufficiently managed to limit any fallout.)
In the worst case scenario, a new global financial crisis would — unsurprisingly — unleash a new wave of turmoil on stock markets. Australian banks, reliant on access to overseas funding sources, would be exposed if borrowing costs surged amid investor skittishness. What Colebatch doesn’t mention is that, unlike during the GFC, China’s economy is also easing off. In short, the conditions aren’t as favourable for Australia this time around.
Can't we just get along?
The prospect of Greece collapsing out of the common currency is not the only pressing challenge for Europe today. The election of François Hollande as the new French president marks a seismic shift in Europe’s power politics. His predecessor, Nicolas Sarkozy, was part of the ‘Merkozy’ duo with Germany’s Angela Merkel — nothing happened in Europe without their agreement. Merkel hitched herself firmly to the Sarkozy bandwagon in France’s recent campaign — now she’ll have to find a way to work with the candidate she opposed.
As the BBC’s Gavin Hewitt writes, the starkest contrast between the Merkel and Hollande world views is over austerity. Merkel is firmly linked with the current strategy of compelling European governments to embrace budget discipline. Hollande has pledged ‘growth’ over ‘austerity’ — as if the two are binary choices — and wants to renegotiate the recently agreed fiscal compact that would bind Europe’s leaders to German economic values. This comes as embattled economies, most obviously Greece, are crying out for an easing of the tight austerity conditions being imposed on them in exchange for bailout funds.
Hewitt foresees a compromise that doesn’t substantively deviate from current plan, but gives some rhetorical ground to Hollande. For example, Merkel will likely agree to greater European Union investment in infrastructure. But there are still some major uncertainties, including about where Hollande stands on dealing with Greece. Circumstances will force Merkel and Hollande to find common ground fast: Europe will be truly dysfunctional without an effective alliance between the French and German leaders.
[Syriza leader Alexis] Tsipras is merely expressing views that are already widespread within large segments of the Athens establishment, namely that the Europeans will ultimately give in and pay up, because they fear a Greek bankruptcy as much as people in the Middle Ages feared the Black Death.
Der Spiegel, German newsmagazine
Greece is almost certain to go back to the polls next month, after parliamentary elections this month proved inconclusive. What seems clear is that radical-left party Syriza looks set to play a dominant role in Greek politics in the near-term. Its young leader, Alexis Tsipras, rails against the austerity measures inflicted on Greece, and is vowing that any government his party supports will reject the conditions and call on Europe’s leaders to return to the negotiating table. Europe is unimpressed with that idea: Germany, in particular, insists that Greece must stick to its bailout agreement, or lose its only financial lifeline.
If Tsipras does find himself, eventually, in a position to call Europe’s bluff — and Germany holds its ground — Greece would likely withdraw from the European monetary union. The writers at German newsmagazine Der Spiegel recognise the pain this would inflict, but also consider it the best option for Europe, and for Greece itself.
From Europe’s perspective, the dangers associated with renegotiating the bailout term are simply too great. If Greece gets a better deal, other recipient states would surely demand greater leeway as well. As it is, Der Spiegel considers that Greece has failed in its current reform program. Meanwhile, public anger in those countries footing the bill — chiefly Germany — would increase. Instead of weaker countries potentially leaving the Eurozone, instead the pressure on stronger countries to depart would grow.
If Greece were to return to the drachma, it could instantly devalue its currency — helping to restore the international competitiveness it has lost within the Eurozone. This isn’t just about consumer purchasing power (that is, raising the relative price of imports into Greece and lowering the relative price of Greek exports abroad). Foreigners could buy up Greek companies for a song, and transform their operations — a chance for the sort of private sector growth that Greece has been sorely lacking in.
Of course, devaluation on its own will not be sufficient. Greece still needs to restructure its welfare system, reduce barriers to industry, and reform its labour laws. These are the measures that will provide the long-term incentives for economic prosperity — and precisely the sorts of things that Greece has struggled with even under the current pressure from investors and foreign governments. And the rest of Europe will have challenges of its own. As Der Spiegel concludes, ‘if Greece returns to the drachma, that will be the point when Europe’s work really begins’.
From the perspective of how the presidency should work, a vice president should never force the hand of a president on a sensitive, first-order issue by getting out ahead publicly. … Biden committed a governmental sin of the first order.
Ben Heineman, lawyer
Last week brought an unexpected, albeit unsurprising, declaration by US President Barack Obama. Obama confided in a hastily scheduled television interview that he had reached a personal view that gays and lesbians should be allowed to marry. In policy terms, Obama’s announcement has little impact: states have legislative authority over marriage, not the federal government. Indeed, Obama revealed his position just days after North Carolina passed a constitutional amendment to ban gay marriage. Nevertheless, the admission was historic. Obama became the first US president to publicly support gay marriage, and a darling to the gay rights movement.
It was a curious time to make such an announcement — at the start of what will be a gruelling campaign for Obama to secure a second term in the White House. But some believe Obama’s hand was forced by his vice-president, Joe Biden, who declared his own pro-gay-marriage position a week earlier. Ben Heineman is one pundit of that view. In a piece for The Atlantic, he slams Biden for jumping out of line with his boss. Heineman concludes that Obama should dump Biden, and pick a new running mate — suggesting the outgoing Secretary of State, and former sparring partner before the last election, Hillary Clinton.
Clinton would, in many regards, be a compelling choice for VP. But before getting carried away with the idea, it’s worth considering Heineman’s reason for making such a switch. He contends that Biden has effectively betrayed his boss. But it is also plausible that Biden was given the green light to air his views as a way to test the public mood in advance of Obama opening his mouth. True, Biden is known for shooting his mouth off. But its also worth noting that education secretary Arne Duncan also endorsed gay marriage before Obama did. (Indeed, Duncan opened up on his views the day after Biden.) If this alternative explanation is true, then the case for dumping Biden is fatally weakened.
That said, if Heineman is right — that Biden’s comments were not coordinated with the Oval Office, and compelled Obama to speak out prematurely — then Biden is certainly a liability for the campaign ahead. If Biden does part with Obama before November, it’ll be a good sign of what really happened this month.
