From black swans to debt seen as a sin, the pain's path leads us to rethink what has become a hard and useless dichotomy: adjustments or growth. But why not adjustments to grow?
We all agree on that it isn't easy, and so far attempts to combine both have miserably failed. In my opinion, there would be three main reasons why we haven't been able to reach the right mix of austerity and expanding economic policies. Firstly, the budget cuts introduced were politically correct but economics-wise mostly inefficient. Secondly, markets have punished countries that implemented them with higher external credit costs and restricted market access, due to general distrust in the soundness of those fiscal adjustments and structural reforms. Thirdly, this is a global economy crisis in which different risk factors feed back on each other: a euro crisis, a geopolitics crisis, a military crisis in the Middle East, an economic slowdown in China, a fiscal cliff in the US…
Demands for more time to activate spending cuts, to add some public investment to them, to relax deficit targets, all have my sympathy. Yet, I cannot give them my support. In a normal economic environment, more time would be available; our current environment isn't normal, though.
Adjustments should go deeper, so our economic growth in the medium term will be ensured. In the short term, the economy's deterioration will be very strong. But there is a factor that is paramount: we need financing. And until either the debt or the risk is mutualised within the euro zone country states, the markets will hunt one country after another when budget consolidation and measures to reign in public debt aren't strict enough.
The European Central Bank programme of unlimited short-term sovereign bonds, which would come into effect if a government officially requires a bailout, would provide extra time for austerity to be fitted within a longer timetable. It would protect companies, innocent victims of this mess, from credit asphyxia.
Indeed, central banks have become a hope lender of last resort. They are the only ones fuelling optimism over the markets in the near future. But, what next? Act now, don't lament for ever.