LONDON
— As Europe has grappled with the trauma of a devastating financial and
economic crisis, policy makers have consistently relied on one approach
to managing the damage — budget austerity.
Shrink
government spending by trimming pensions and cutting social programs,
the logic runs, and the markets will gain confidence in the tough-minded
people in charge. Confident markets make for happy markets. Money will
pour in, and good times will roll.
Even
as prosperity has remained painfully elusive across much of Europe,
leaders have time and again renewed their faith in the virtues of this
harsh medicine.
Until now.
Europe
is re-examining the merits of austerity. Some policy makers are
flashing tentative signs that they may be prepared to slacken their grip
on public coffers to spur growth and improve the lot of ordinary people
suffering joblessness and diminished wealth. In the clearest sign of
this shift, the heavily indebted Italy is increasingly inclined to
challenge Germany — the guardian of austerity — to loosen European purse
strings.
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The
development comes after Britain’s stunning vote to abandon the European
Union, an angry rebuke of the economic elite within struggling
communities, and as populist, anti-immigrant movements across the
Continent gain traction.
Above
all, the change could be an antidote to years of dogmatic European
policies, replacing a failed effort to generate economic growth through
cutting spending with a focus on bolstering investment.
“Austerity
is out of the discussion in a way,” said the Italian finance minister,
Pier Carlo Padoan, during a recent interview in Rome. “We need to bring
more growth and more jobs to Europe.”
The most obvious place the new dynamic is unfolding is in Britain.
What’s Next for Business After ‘Brexit’?
Several months on, little is clear. Britain’s trading
relationship with the E.U. looks to be in limbo. Companies are
reassessing their long-term investments in Britain. Here’s what’s
happened so far.
Before
the June 23 vote for “Brexit,” the man in charge of the budget, the
chancellor of the Exchequer, George Osborne, was publicly pursuing the
aim of delivering a budget surplus by 2020. The target required cuts.
But
as the political class absorbed the ballot result, interpreting it as a
demand for redress from communities reeling from high unemployment and
wage stagnation, Mr. Osborne acknowledged that his goal could no longer
be achieved.
His successor, Philip Hammond, has raised the ante.
In a speech at an annual gathering of the governing Conservative Party on Monday, the new chancellor declared
that the government would borrow more to finance new infrastructure
projects — presumably creating construction and manufacturing jobs.
Budget
cutting has given way to fresh spending in large part because of fears
of the economic consequences of Britain’s potentially tortuous European
divorce proceedings. Investment is expected to slow, reflecting grave
uncertainty. British exports could be threatened. High-paying finance
jobs could shift from Britain to other countries in Europe.
But
any fair conversation about austerity must reckon with a complex
reality: There are great divergences between the rhetoric of
policy-making and the actual spending of money.
In
Britain, Mr. Osborne presented himself as a courageous guardian of the
treasury, intent on making cuts to balance the books. At the same time,
he ran budget deficits that were proportionately larger than those in
France, where a Socialist government, supposedly intent on handing out
loot unencumbered by arithmetic, was in power.
In
the United States, the Obama administration responded to the Great
Recession with a $787 billion fiscal stimulus bill — a mixture of tax
cuts and increased government spending. Its economy proceeded to recover
more vigorously than Europe’s, giving rise to the notion that stimulus
was at work on the American side of the Atlantic, while austerity
prevailed across the water.
That story, however, is overly simplistic.
In
Washington, bickering over the size and duration of many social
programs — emergency unemployment benefits, food stamps and housing
supports — effectively curtailed the scope of these efforts. In Europe, a
vastly more generous social safety net limited the impacts of
joblessness.
Any
alteration to European economic policy inevitably involves Germany. The
region’s largest economy, it wields outsize influence over the levers
of economic policy.
The
European Union maintains rules limiting budget deficits and public debt
burdens. Countries that exceed the limits are subject to negotiations
over the consequences.
To
Germany, those rules are immutable (unless Germany is the one asking
for some slack). The German economic view, analysts say, is dominated by
moralistic judgments and a grave fear of inflation. Deficits reflect
weakness of will and undermine the value of money. Prosperity comes from
discipline and sacrifice.
German
voters have expressed alarm at any possibility that their abundant
savings might be used to rescue reckless borrowers on the Mediterranean.
This trait has been most on display as Germany has demanded sharp cuts
in government spending as a condition for successive bailouts of Greece
by European authorities. But it has similarly colored German demands for
strict adherence to the limits on deficit spending by Spain, Portugal
and other crisis-assailed European nations. (And never mind, critics
charge, that most troubled European economies landed there not because
of too much public spending, but because of disastrous private borrowing
— often extended by German banks.)
Germany,
economists say, is effectively combating a phantom: The real threat is
not inflation, but the opposite — deflation, or falling prices. When
prices are dropping, that means demand for goods and services is weak,
and that reduces the incentive for businesses to expand and hire.
Faced
with such a downward spiral, the traditional economic playbook calls
for government to step in and spend money, even if that entails running
deficits. Construction projects, for example, put cash into the pockets
of construction workers, who then spread their wages through the
economy.
Spain
and Portugal experienced veritable depressions during the worst of the
crisis. Both have been eager for relief from the strictures of these
spending caps. Both are running budget deficits well above the limit — 3
percent of gross domestic product. Yet in July, European authorities chose not to fine either country, instead giving them additional time to bring their deficits under the cap.
“On
the merits, Spain, Italy and France should be ganging up on the Germans
and outvoting them and strong-arming them,” said Adam S. Posen, a
former member of the rate-setting committee at the Bank of England, and
now president of the Peterson Institute for International Economics in
Washington. “For whatever reason, they don’t get there, and I genuinely
don’t understand it.”
Italy is now making a run at it.
Last
month, its prime minister, Matteo Renzi, accused Germany of putting
European interests at risk by refusing to allow more government
spending.
“Stressing austerity means destroying Europe,” Mr. Renzi declared at the Council on Foreign Relations
in New York. ”Which is the only country which receives an advantage
from this strategy? The one which exports the most: Germany.”
In a series of recent interviews in Rome, top Italian officials outlined intentions to liberate Europe from austerity.
“If
you want to close this divide and you want to persuade your citizens
that there is opportunity in the internationalization of the economy and
innovation, you need to invest a lot,” said the Italian minister of
economic development, Carlo Calenda. “The question is whether you do it
within the European rule or whether you break the European rule. What we
are trying to do is to stay within the European rule.”
But
not forever, Mr. Calenda added. Greece confronted Germany loudly and
directly as it submitted to wrenching cuts as a condition of the
bailouts. Italy is mounting a quieter challenge, operating within the
rules while finding favorable interpretations that allow greater
spending.
“We
do think there is space to maneuver in order to change the European
rule,” he said. “If we will be in a situation where we need to act in a
stronger way, especially on fiscal space, then we will take that into
consideration.”
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