Chorus: Austerity isn't working

A week ago we had another strike by the rating agencies, this time Standard and Poor's. Closing a week that had been relatively successful for the European debt market, the continent was once more bombarded with a swarm of downgrades. Nine states saw their grade derided, with France and Austria loosing AAA status and Italy kicked out of the A area into BBB+. Over the weekend we had the usual cries from political leaders, employing hard words but soft action. Nevertheless this week further signs of relief in the debt market came about: Portugal was able to auction 11 month maturity bonds with interest below 5%, better than before the aid request, Austria was able to auction 50 year bonds for what it seems only the second time in its history and interest rates in the secondary market for Italian bonds have entailed a slow but constant decline. The defense against the rating agencies put up by the ECB seems to be finally yielding results.

But something less visible has remained from last week's attack: the analysis upon which Standard & Poor's supposedly based its downgrades. The company vised particularly the blind Austerity policy followed by the Council, joining the body of voices claiming it is leading Europe to a dead end. This is an interesting and useful outcome of the unsuccessful strike, that echoed through the last days. Le Monde published a wrap up that is worth looking closer.

The Austerity/Exports recipe is being put openly at cause by different voices, a discourse that Standard & Poor's helped bringing to the front pages. Le Monde quotes Joseph Stilglitz, a long time opposer to this sort of strategy, that recently even compared it to the medical practice of bleeding in Mediaevel times:

Parmi ces voix, l'une des plus pessimistes est celle du célèbre économiste américain Joseph Stiglitz, prix Nobel en 2001, qui lors du Forum financier asiatique de Hongkong, mardi, est allé jusqu'à comparer l'austérité à "la pratique de la saignée dans la médecine médiévale". Celle-ci pourrait, selon lui, provoquer à terme la disparition de l'euro.

Among these voices one of the most pessimistic is that of the famous american economist Joseph Stiglitz, Nobel prize in 2001, whom at the financial Asian Forum of Hong Kong, went as fas as to compare austerity to the “bleeding practice of mediaeval medicine”. Which according to him can result in the end of the euro long term.

Stiglitz also stresses that the Council's obsession with debt misses the fundamental point that deeper causes are at the root of the economic difficulties we face today:

Lors d'une conférence économique en Argentine, en décembre, Stiglitz déclarait déjà que "les politiques d'ajustement aux Etats-Unis et en Europe ne résoudront pas la crise économique. Le déficit budgétaire n'est pas à l'origine de la crise, c'est au contraire la crise qui a causé le déficit budgétaire".

Last December at an economic conference in Argentine, Stiglitz had already declared that “the adjustment policies in the United States and Europe do not solve the economic crisis. The budget deficit is not the root of the crisis, it's the opposite, the crisis has caused the budget deficit”.

The vicious circle of more austerity, less income, lower GDP, higher debt ratio is explained by another economist:

L'économiste André Grjebine, directeur de recherche au CERI-Sciences Po (Centre d'études et de recherches internationales), déplore, [...] "dans un tel contexte, les Etats les plus vulnérables sont donc acculés à pratiquer des politiques d'austérité pour satisfaire aux exigences de leurs créanciers. En hypothéquant ainsi leur croissance, ils réduisent leurs recettes publiques et rendent plus problématique encore le remboursement de leur dette publique".

The economist André Grjebine, research director at CERI-Sciences Po (Centre for international studies and research), says: “in such context, the most vulnerable States are thus forced into austerity policies to satisfy the exigences of their creditors. This way also compromising their growth, they reduce public income and render the reimbursement of their public debt even more problematic”.

This spiral will naturally lead to an unsustainable social situation, that sadly is already in place in Greece. From then onwards things get very hard to solve in a timely fashion.

Ces mesures ont un impact social non négligeable, puisqu'elles sont synonymes de "compression salariale, pour réduire le coût du travail. Automatiquement, le chômage va augmenter et la demande, se réduire. Cela peut durer très longtemps", s'alarmait mardi, dans un article du Monde, Anne-Laure Delatte, économiste à laRouen Business School.

These measures have a non negligible social impact, for they are synonyms with “salary compression to reduce labour costs. Automatically, unemployment rises and demand pulls back. And this can take a very long time”, wrote last Tuesday Anne-Laure Delatte, economist at the Rouen Business School in an article at Le Monde.

So what's the alternative to Austerity? Le Monde presents an Econ 101 solution to counter the trade balance assymetries across the Eurozone:

[…] les pays européens devraient mettre en œuvre des politiques économiques susceptibles à la fois de soutenir la croissance et de faciliter ainsi le remboursement des dettes publiques et de rééquilibrer les balances courantes entre pays de la zone euro. Ce double objectif ne paraît pouvoir être obtenu que par une relance dans les pays excédentaires, en premier lieu en Allemagne

[…] the European countries must set in place economic policies capable of both supporting growth and facilitating the reimbursement of pubic debt and of re-balancing the current balances between euro zone countries. This double objective cannot be achieved by other means than through a relaunch in the countries running surpluses, in first place in Germany.

Up to 2009 this balancing was guaranteed by the existence of an European debt market, where banks from surplus states made extra resources available to deficit states. When in early 2010 was known that the EPP had been cooking the books in Greece no defensive measures where put in place, providing the rating agencies the space to fire at will. Eighteen months later the European debt market was essentially gone.

The alternative strategy presented by Le Monde can have some effects short term, but like Austerity does not secure a sustainable outcome long term. That because in 2008 a social-economic system based on imported fossil fuels collapsed in the states of the EU that neither had indigenous fossil resources nor had built a relevant Nuclear park after the II World War. By chance in three of these states Latin languages are spoken, which gave some Fascist factions meat to grind.

The problems we live today have not that much to do with political or economical philosophy, they are essentially bio-physical.