EC Director General Marco Buti and Nicolas Carnot have recently attempted to debunk the “austerity myth”, alleged by critics to be the EU’s crisis resolution mantra. In their ECFIN Economic Brief of March 2013 “The debate on fiscal policy in Europe: beyond the austerity myth” they endeavor to refute 5 allegations, that there was “irrational panic in the sovereign bond markets” (1), the “the adjustment is too front-loaded” (2), that “the Commission follows an inflexible approach” (3), that “fiscal consolidation is not politically or socially sustainable” (4), and that “the Commission’s approach is one-sided [and] puts all the burden of adjustment on debtor countries”(5).
As one of the critics of the EU’s approach, manifested in several posts in this blog, I think that their endeavor is not successful. While Buti and Carnot launch an understandable defense of the EU’s approach, their arguments are weak, they are more statements than thought/through refutations. Moreover, they ignore one of the strongest arguments of the critics, namely that the EU’s singular concentration on individual EU and EZ countries omits to take account of the fiscal position of the EU/EZ as a whole and of the effect of all EU/EZ countries’ consolidation policy on the weakest countries of the EU. In this way, they negate the hoped-for effects of a fiscal union.
While the authors proudly confirm the EC’s flexible approach (all. 3) on the account of having postponed two times the deadlines for consolidation, they omit the fact that the unexpected length of the recession (double-dip, triple-dip) is likely the result of the joint consolidation efforts by EU/EZ countries and that consequently the whole consolidation strategy might be in need of change. I would argue that the fact that in the authors’ rebuttal there is no consideration of the effects of consolidation on GDP growth constitutes a significant weakness. Also, when they refer to the fact that in 2009/10 the EU-wide stimulus packages were accompanied by commitments to be followed by fiscal retrenchment, and thus confirm that present EC policies are the fulfillment of these commitments, I would argue that the unexpected length and depth of the recession (the EZ’s GDP is still below that of 2007) should have led to a policy change.
Buti/Carnot also argue that critics, while condemning the front-loading of “adjustment” (all. 2), do not provide a detailed alternative (p.2). However, many critics have provided alternatives and thus have not “evacuated the hardest issues faced by policymakers” (see e.g. the EU-sponsored project on a European growth strategy, led by the Austrian Institute of Economic Research wwwforEurope, deGrauwe, and many others).
They also argue (all. 1) against the purported irrationality of bond markets. While they agree that “markets are prone to excessive swings”, they state that this need not imply that markets acted purely out of irrational fear in the sovereign bond crisis. Their proof is that bondholders lost during the Greek crisis (yes, but what about the earlier years when before the crisis the bond spreads were non-existent?), and that sovereign spreads were and are at least loosely correlated with the underlying fundamentals. Is that still true when one compares spreads before and after 2008? Is this sanguine assessment an adequate basis for policy-making? I am rather skeptical.
Some of the macroeconomic data of the crisis countries have recently improved. Buti/Carnot mention structural fiscal balances, external and relative competitiveness positions as proof that the chosen strategy is working (all. 1). I would argue that some of these improvements, especially those referring to competitiveness, are temporary effects caused by the recession and not structural improvements. In any recession, external balances tend to improve, because the ability of the economy to import is restricted. Structural improvements depend more on the export side, the variety and quality of exportable products in the face of global competition.
That fiscal consolidation might not be politically sustainable (all. 4) is treated in a strange way, because there no arguments pro or con are being advanced, but only exhortations that consolidation should also promote structural change. Yes, but? No mention is made of unemployment, of the rapid increase in youth unemployment, of the violent demonstrations in Greece, Portugal and Spain, of the fact that all governments were voted out of office where elections took place, the rise of left and right populist parties, etc., etc. How much more manifestations of political non-sustainability do the authors still need?
The discussion of all. 5, whether the EC’s approach puts all the adjustment burden on debtor countries, is welcome and surprising after the previous pages. The authors acknowledge fully the need for a more symmetric adjustment, that also creditor countries have an obligation to fuel demand by tax, labor market and product market reforms, but deplore the lack of available instruments. However, the current balance adjustment requirements in the Europe 2020 strategy are – again – asymmetrically directed towards deficit countries. The authors also admit, that the Commission’s proposal for a “dedicated stabilization fund” should be considered only in the longer run, thus has no place today.
This is a disappointing paper. It staunchly defends the present EU approach to crisis resolution, without mentioning the fact that the single-minded emphasis on budget consolidation and the weak and subjugated efforts towards growth are responsible for the extended and ever more severe recession (viz. the increasing unemployment rates, especially of youths). The paper remains within this chosen framework and does not even hint at a possible policy change. The defensive arguments are weak, they consist mainly of non-substantiated statements. A thorough refutation of the many arguments by critics would have been in place. This chance has been missed.