Europe’s electorates have given their answer to austerity as the way to recover from debt and recession. In council elections across Britain, in the fall of the center-right Dutch coalition government and in the Greek parliamentary elections, voters have rejected Germany’s attempt to impose austerity on the European Union. In France, President-elect François Hollande’s campaign message was simple—without growth there can be no recovery. It had the rhetorical advantage of being true. This minor revolution should provoke a reassessment of austerity in the United States, where the policy has likewise been prescribed as public debt mounts and economic uncertainty persists.
Sharp cutbacks in government spending—which would cause the loss of thousands of public sector jobs and deep reductions in social services and infrastructure spending—have been pitched as part of the counterintuitive recipe for a long-term revival of flagging national economies. Deficit hawks hope to reduce government debt and thereby encourage expansion in the private sector. But the swing to austerity, whether propelled by philosophy, as in Great Britain, or by the edicts of the credit market and the I.M.F., as in Greece, Spain and Ireland, has stifled growth while creating severe hardship for the European public.
Unemployment remains at Great Depression levels in Spain. Recession has revisited Great Britain, Italy, Belgium and the Netherlands. The Irish economy has locked up. Whole populations are taking the hit for risky banking methods and speculative housing investments. Banks have been salvaged, for the most part. But so far, they have shown their gratitude for the public bailout by resisting new capitalization requirements and government re-regulation.
There are two main problems to solve: debt and the stimulation of national economies to provide jobs. Greece, with its complex of overgenerous social spending, flagrant tax avoidance and widespread corruption, is a special problem. But for the rest of Europe, a combination of economic stimulus, budgetary restraint and revenue-raising would help.
Mario Monti, the technocratic Italian prime minister, has proposed a number of stimulus measures for consideration at the European summit in June. Reportedly he has received support from Chancellor Angela Merkel of Ger-many. That is good news. Government budget-tightening is no way to reduce deficits and debt unless workers and businesses are prosperous enough to pay down their nations’ debts with their taxes.
There remain viable options toward a more measured restoration of fiscal health in Europe by promoting job creation, tweaking monetary policy and retooling the European Central Bank. While some nations within the European Union are incapable of expansionist policies, others, Germany primarily, can embark on pro-growth strategies that will benefit the entire continent. Lagging European economies can focus on resolving longstanding problems with corruption, government waste and tax collection that can help improve their national balance sheets.
A program of fiscal reform will succeed only if the public perceives that the cure is not creating more suffering than the disease. Some economists and political leaders continue to advocate shock treatment as a path to long-term solvency—surely a desirable goal—but this approach is seldom humane and threatens to create social unrest that could jeopardize the entire program of reform. Establishing more modest fiscal goals and reasonable social boundaries—a glide path toward fiscal stability rather than an emergency hard landing—is a more practical and responsible course of action. It is more amenable to the public and hence more likely to be embraced by it.
Pro-growth politicians should create face-saving space so that the austerity advocates, recognizing the economic facts on the ground, can step back from public positions that have hardened into ideology. Despite the economic calamity of our times, European unity remains a worthy goal; the political progress and economic integration achieved in recent decades must not be allowed to backslide because of a short-term imbalance.
Voters in Europe were not endorsing Keynes over Hayek when they went to the polls; they were voting out leaders who had brought them no relief from economic uncertainty because they failed to create more jobs and improve national solvency. They are suggesting moderation in government efforts to deal with historical overspending and government deficits by prodding economies forward, not by throwing them into reverse. The voters’ instincts for change may be precisely the right strategy toward a fiscally and economically restored Europe. It would be a shame if politicians in the United States, who appear bent on repeating Europe’s recent mistakes, do not learn from the hard-earned wisdom of European voters.