Austerity, rules, and fiscal policy

Much of the commentary on the Greek crisis has focused on “austerity”, which has established itself as the central concept in most analyses. There is a very strong current in at least the English-language economics commentary to indict the excessive austerity demanded bausterityy the eurozone (and the IMF!) for the collapse in Greek GDP, and the consequent unsustainable nature of Greek public debt. Proponents of this view include Nobel prize stars Joseph Stiglitz, Amartya Sen and Paul Krugman. The Keynesian theory is simple enough, even for this dilettante in the field, a mere lawyer, not an economist: in times of crisis, when the private sector saves rather than spends in order to repay excessive debt and to recover, governments need to spend more. If in such times the government also spends less, the crisis only intensifies and government revenue decreases with further negative effects on public debt. By contrast, when growth resumes as a result of expansionary policies, government debt can be more easily repaid, and will to some degree take care of itself through inflation and greater revenue. Who are we to disagree? But those are not the policies which the eurozone has embraced.

And yet, as a lawyer, I’d like to examine the evidence, forensically, and would love to cross-examine the witnesses. Not about whether the theory is correct – that looks incontestable. But about the realities of the eurozone sovereign debt crisis. Why is it, for example, that essentially the same bailout policy did not destroy the Irish and Portuguese economies? Why is it that UK austerity policies, which are also pretty tough, have apparently not undermined the UK economy, which has been recovering more quickly than the eurozone, and has enviably high employment (and unenviably low real wages …)? Why is it that the Spanish economy seems to be on the mend again, notwithstanding strict austerity policies? As long as I don’t get convincing answers to those questions, I continue to think that there is more at hand in the Greek crisis than misconceived austerity.

The political actor most vilified for this austerity drive is doubtless Mr Schäuble (also a lawyer …). He definitely looks most austere, and is seen as embodying Germany’s wrong-headed (some say self-serving) insistence on eurozone austerity. But those who look a bit more closely at Mr Schäuble’s policies see more than a failure to understand Keynesian economics. One recent comment which struck me is that he now considers that a Greek debt haircut – which would clearly hurt Germany as the main creditor – can be talked about if Greece leaves the eurozone, but not if there is no Grexit. He in fact claims that eurozone law prohibits this, a claim convincingly rebutted by inter alia Armin von Bogdandy. But leaving the legal argument to one side, this focus on eurozone rules is revealing. The euro was set up without a fiscal union which would allow for transfers from richer to poorer eurozone countries, without a common economic policy, and without a common budgetary authority. All of that was a bridge too far, at Maastricht, in terms of transfer of sovereignty – or several bridges probably. The deal was that each eurozone country would remain fully responsible for its budgetary policies and equilibrium, hence the no-bailout clause of Art 125 TFEU. Instead of moving to a real political union, as it is mostly called, the negotiators decided to establish strict disciplines for participating states, the famous Maastricht criteria. Rules instead of a common fiscal and economic policy. This focus on national responsibility and strict rules is a central pillar of EMU. So it is not at all surprising that someone like Mr Schäuble, who regards himself as an architect of EMU, insists on Greece living by the rules. In fact, the complete failure of the 6 months of negotiations between Syriza and the eurozone seems to me to have been mostly caused by the unbridgeable positions of a rule-based eurozone approach and a new Greek government regarding itself as wholly sovereign because democratically mandated.

The financial and sovereign debt crises have not as yet led to anything resembling a fiscal union which would allow for EU redistributive policies. Indeed, the term fiscal union as it is currently used in some of the political discourse strikes me as either completely utopian or pretty deceptive. In the many decades of European integration it has so far not been possible to develop any common fiscal policies, other than in the fields of customs duties (a function of EU trade policy) and the system of VAT, but not the rates and most of the revenue from it. To the extent that the EU has competences in the field, it is held back by unanimous decision-making. So a real fiscal union is an utopia, or else a deceptive term which is used to denote just doing a little more at EU level than before.

Instead of moving in that direction, the EU has responded to the crises by ratcheting up the rules. Stability and Growth Pact, Fiscal Compact, Six-Pack and Two-Pack, you name it, it is all more of the same: stricter rules for national budgetary policies, more strictly enforced. From this perspective, it is understandable that Mr Schäuble insists that Greece cannot default within the eurozone: not only has it disobeyed the rules, it has then needed several bail-outs, and if its debt is now partially cancelled the eurozone might just as well throw its rule book away.

But the process of ratcheting up the rules strikes me as pretty desperate. When a major crisis such as the 2008 one strikes, no rule book enforcement is going to resolve it. Spain is the best example. Its sovereign debt was within the Maastricht norms, but when its banking and private sectors crashed its debt ballooned.

To sum up, the eurozone austerity fixation seems to me as much a function of the imperfect monetary union which was created, as it is the result of misguided economic policy-making. It makes little sense further to strengthen the rule-oriented approach (yes, and it is a lawyer stating this). Instead there needs to be some kind of real fiscal policy at eurozone level which allows for some degree of redistribution. Otherwise the euro project will lose all legitimacy, particularly in the countries which are suffering more. Scope for some more thinking and blogging.

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