Austerity falls into disgrace

It is no longer fashionable to portray budgetary cuts and austerity as an unpalatable experience yet essential to ensure stability and long term growth. As this assumption has proved utterly misconceived, former advocates of such hard medicine tend to cast a most critical view on its merits. The IMF was the first to voice concern on the downturn pressure the extensive fiscal consolidation was inflicting on Europe. Now the Brussels establishment joins that move even if only yesterday it was pressing deficit-ridden countries to bite the bullet.

Structural reform is the new gadget intended to shape a more friendly policy stance. For all the need to enhance competitiveness and axe market rigidities all year round, this rather loose objective merely stands as a good excuse for refraining from fixing precise targets. Sure enough, recommendations will be tabled for more flexible labour market arrangements, further liberalisation and other good intentioned goals, few governments will be able or willing to fully implement. Daily wrestling with budget imbalances will be shelved and a more placid rest in limbo surroundings will take over.

Does such a radical switch stem from a sincere sense of guilt at the appalling performance the current discipline has delivered? There are good reasons to doubt repentance being the driving force in this policy U-turn. The prospect France, not to mention Italy or Spain, will flatly fail to meet their targets stands as a more plausible explanation. The current recession is derailing plans to enact budget stability as the Euro cornerstone, as targets only make sense when they can be possibly reached. Otherwise, they have the potential to severely undermine confidence, plunging once again vulnerable economies into utter disarray.

No one seems to care about the mounting growth gap likely to transform Europe into a lame duck in terms of economic performance. Don’t count on a few reforms for addressing the deeply entrenched crisis. So long as enterprises and citizens undertake a vast balance adjustment nothing will prevent the current protraction. But adding a vicious circle of depressed demand conditions only contributes to make thing worse.

The Euro asymmetry is to blame for enforcing fiscal neutrality while tying up the monetary policy to inflation curbing regardless of the economic outlook. The ECB attempts to explore new territories have not gone far away. Unless such blatant shortcomings in global demand management are swiftly redressed we will lack stamina to escape from a zero-growth scenario. Forcing governments to preserve balanced budgets and preventing the central bank from tackling recession in a resolute way, will lead Europe into sheer irrelevance even if it travels for the time being on a first-class ticket.