After suffering job losses and slashed benefits for more than two years, Europe’s voters have exploded in anger against European Union (EU) mandated austerity. French and Greek electorates have thrown out the governments that subjected them to such harsh measures in a bid to avoid bankruptcy. Stung by the repudiation, the EU, led by Europe’s paymaster Germany, may now seek to appease citizens with a separate growth pact. But even if the bondholders showed patience, creating jobs by borrowing more can only bring short-term relief — not redress the basic economic imbalance. The massive structural changes that would be required to lift Europe out of its morass remain the elephant in the room that politicians find convenient to ignore.
The debate has instead focused on the more immediate austerity vs growth dichotomy. Europe’s deficit hawks led by German chancellor Angela Merkel have pushed for drastic cuts to rein in budget deficits. Their argument is that deficit reduction will restore confidence in the market and lower borrowing costs, which have skyrocketed in recent years. That assumption belies, however, the experience of the past year, when budget cuts translated into layoffs, the slashing of benefits, higher taxes and the retirement age being raised without raising either revenues or market confidence. Greece, in particular, has been racked by suicides and the prospect of mass poverty.
The opponents of the austerity policy are now encouraged by the election results, which they see as the beginning of a general revolt (although the Greek demands for repudiating the bailout agreement are more radical than French calls for a new growth pact). They argue that stimulating growth by creating jobs would reverse the austerity-driven economic death spiral. Indeed, the cuts have not helped countries such as Spain lower bond yields while a shrinking economy has raised unemployment to a record 23.6 per cent — as much as 50 per cent among the youth. Despite draconian spending cuts, Ireland, too, is in the doldrums, with unemployment reaching nearly 15 per cent. Meanwhile, budget cuts in France have seen unemployment soar to 10 per cent and the country’s triple-A rating has been slashed by at least one rating agency.
Now that François Hollande has won French elections and Merkel has indicated her willingness to negotiate a supplementary “growth pact”, will Europe be on the mend? Germany may be extending a symbolic olive branch to its key European partner, but it has made it clear there will be no retreat from austerity that Hollande called for during his election campaign. Even promises to create 60,000 new teachers’ jobs in five years — as proposed by Hollande — would require trimming a similar number of government jobs to prevent any panic in the bond market.
What is being overlooked in this intense debate over austerity and growth and, of course, the urgent need to save the Euro Zone, is that neither course will restore Europe’s prosperity. The failure of the austerity policy to generate confidence and growth is clear but there is scant indication that simple government stimulus would succeed either. The standard Keynesian remedy for a recession — increasing aggregate demand by creating jobs through infrastructural investment — is hard to apply to Europe with its superfast trains and highways.
The unpalatable truth is that while the European economy grew and its citizens enjoyed unprecedented prosperity and security, the ground beneath them has shifted. The rise of China, India and other developing countries has brought billions of new workers onto the global labour market. The rise of cheap container shipping, digital technology and supply-chain logistics has shifted manufacturing eastward, making goods cheaper while eliminating jobs in the West. Internet and automation, too, have made many jobs redundant. Productivity growth and higher corporate profits have been accompanied by growing numbers of unemployed. What most of Europe (except Germany) needs to be competitive in this new landscape is a different economic model where nanotechnology and automation rule, with education and innovation being the main drivers.
Without the courage to face wholesale transformation, the European economy will be caught in a downward spiral that paves the way for social turmoil. The sharp rise of the xenophobic National Front in France and the violent neo-Nazi Golden Dawn party in Greece are storm warnings of the failure of leadership.