Monday, May 7, 2012

Can we celebrate the end of 'Merkozy'? Krugman and Stiglitz about the desastrous effects of austerity

 Paris celebrates Hollande's victory. Place de la Bastille, 6 May 2012.

 ''The French are revolting. The Greeks, too. And it’s about time,'' writes Paul Krugman in Monday's New York Times. The conomist and Nobel prize laureate welcomes the victory of François Hollande over Nicolas Sarkozy in the French presidential elections and the fact the Greeks did away with the leading Conservative and Pasok parties in Greece. Krugman recalls that The Economist, warned us for Hollande and wrote about him that he is 'rather dangerous' because he 'genuinely believes in the need to create a fairer society.' - To which Krugman comments: Quelle horreur!

 What is true is that Mr. Hollande’s victory means the end of “Merkozy,” the Franco-German axis that has enforced the austerity regime of the past two years. This would be a “dangerous” development if that strategy were working, or even had a reasonable chance of working. But it isn’t and doesn’t; it’s time to move on. Europe’s voters, it turns out, are wiser than the Continent’s best and brightest.
What’s wrong with the prescription of spending cuts as the remedy for Europe’s ills? One answer is that the confidence fairy doesn’t exist — that is, claims that slashing government spending would somehow encourage consumers and businesses to spend more have been overwhelmingly refuted by the experience of the past two years. So spending cuts in a depressed economy just make the depression deeper.

Let's rejoice in Hollande's victory - or was it rather Sarkozy's defeat? (click here -French or  here (Dutch) -  - and hope that the strict austerity package is off the table, or at least will be amended. Krugman had been arguing against it over the past months. Like him, his colleague Joseph Stiglitz, also a Nobel prize laureate,  has severely criticized the path the European leaders took and maintained that cutting the budgets in times of economic crises is a perfect recipe for committing suicide. But he also pointed towards what could possibly be done to cure the illnesses. Like in this piece 'After Austerity': 

The consequences of Europe’s rush to austerity will be long-lasting and possibly severe. If the euro survives, it will come at the price of high unemployment and enormous suffering, especially in the crisis countries. And the crisis itself almost surely will spread. Firewalls won’t work, if kerosene is simultaneously thrown on the fire, as Europe seems committed to doing: there is no example of a large economy – and Europe is the world’s largest – recovering as a result of austerity.
As a result, society’s most valuable asset, its human capital, is being wasted and even destroyed. Young people who are long deprived of a decent job – and youth unemployment in some countries is approaching or exceeding 50%, and has been unacceptably high since 2008 – become alienated. When they eventually find work, it will be at a much lower wage. Normally, youth is a time when skills get built up; now, it is a time when they atrophy.

Europe as a whole is not in bad fiscal shape; its debt-to-GDP ratio compares favorably with that of the United States. If each US state were totally responsible for its own budget, including paying all unemployment benefits, America, too, would be in fiscal crisis. The lesson is obvious:  the whole is more than the sum of its parts. If Europe – particularly the European Central Bank – were to borrow, and re-lend the proceeds, the costs of servicing Europe’s debt would fall, creating room for the kinds of expenditure that would promote growth and employment.
There are already institutions within Europe, such as the European Investment Bank, that could help finance needed investments in the cash-starved economies. The EIB should expand its lending. There need to be increased funds available to support small and medium-size enterprises – the main source of job creation in all economies – which is especially important, given that credit contraction by banks hits these enterprises especially hard.

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