7th Jul 2022

Cracks show in EU austerity doctrine

If the subtle change in emphasis in the EU’s discourse on austerity is to be believed, some in the bloc are beginning to be much more open to policy options beyond public-sector cutbacks.

On Thursday (14 October) in a speech to Europe's great and good at an annual Brussels pow-wow of government ministers, journalists, businessmen and even nobility, European Commission President Jose Manuel Barroso marked a change in strategy, or at least in the rhetoric surrounding the bloc's policy response.

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  • The second bail-out programme for Greece: More austerity or 'reconstruction'? (Photo: European Commission)

"Are austerity cutbacks the right solution for Europe’s economic woes?" he asked.

Responding to his own question, he declared: "As you may have guessed, dear friends, the commission does not believe that cutbacks are the solution to Europe's challenges."

At the same conference, Poland's finance minister, Jan Rostowski, warned that "Cuts could - and this really is true - can make the recession worse."

He described a "vicious cycle" wherein the imposition of austerity on a weak economy can suppress demand, which then inhibits companies' willingness to invest, which frightens other firms from investing and encourages households to save instead of spend. As the economy takes a nosedive, government revenues decline, expanding public debts, forcing further public-spending cutbacks.

Brussels has certainly not abandoned austerity as a solution to the eurozone's debt crisis, but some leaders are beginning to concede that it is not the only solution.

"Yes, sound public finances are an essential part of sustainable growth; they are an essential part of confidence and without confidence there is no growth," Barroso continued. "[But] to focus solely on cuts suggests that government over-spending was the only source of the crisis. In fact, we all know that problems with the behaviour and regulation of the financial sector, and problems of political will, are also factors in this crisis."

Barroso warned that the "wrong" type of austerity could reduce demand and prevent an exit from crisis. "We also know that the wrong sorts of cuts could simply send Europe into recession."

He said that fiscal consolidation must be joined to structural reform in the public sector - a form of cuts by another name, some, particularly the trade unions that represent government employees, would say.

He also said that there is little room for a new round of public spending to kick-start the economy: "New growth cannot be funded through more and more public debt,” he continued. “It is clear that there is more room for structural reform than for fiscal stimulus."

But he emphasised the need for investment in new infrastructure in the energy, transport and digital sectors and highlighted the commission’s proposals for the bloc's multi-year budget. The budget ideas involve a new €50 billion investment in infrastructure and EU-level 'project bonds' that could be sold to raise cash for such investments.

"This effort should be part of a huge pan-European investment programme, which includes an increase in the capital of the triple-A-rated European Investment Bank," he said.

The speech paralleled similar comments from European employment commissioner Laszlo Andor, who said that the next bail-out programme for Greece must be a massive, multi-year "reconstruction plan," not just another round of austerity.

"Greece needs to have a reconstruction programme. That's why it's very important how the next programme for Greece, which is in the pipeline, will be orchestrated," he told reporters on Thursday. "Will it be orchestrated and presented as another programme of austerity, which will ensure that there are further cuts in expenditure in Greece, or presented in a way that ... launches infrastructure building in Greece?"

Bleeding to death

"We cannot leave Greece to bleed to death," he added. "What does a marshall plan mean? It is a reconstruction plan, it is not punishing but supporting, so long as there is transformation."

Ando added that any shift in EU economic strategy is "a very incremental one."

He said each time EU leaders meet, the debate shifts slightly: "You get a bit of a haircut [for bondholders], in another you get a financial transactions tax, in another one a bit of co-financing, but it comes in a very piecemeal way."

"The question is whether we can develop a critical mass in terms of these new types of measures," which he suggested would depend more on publicly co-ordinated finance than on the private sector.

"It’s not unheard of that a country depends on multi-lateral loans instead of financial markets. It’s relatively recent that sovereign borrowing is based on financial markets."

Brussels calls for still more austerity

Most states have slashed tens of billions from their public spending plans already, but this may not be enough according to an annual report from the EU executive.

Berlusconi struggles to implement austerity measures

Italian Prime Minister Silvio Berlusconi on Monday agreed to scrap a controversial wealth tax and to limit the cuts to regional governments, raising questions about the government's ability to implement a €45 billion austerity package.

Rising prices expose lack of coherent EU response

The increasingly sharp debate over the rising cost of living exploded in European Parliament, with lawmakers from all stripes, liberal, left, green and conservative, calling on the EU to act.

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