Austerity alive and well in Europe

To listen to some European leaders, especially in France, you would think austerity was over and the eurozone was going full steam ahead to revive economic growth.

In a change of tone, European Commission president Jose Manuel Barroso said last month that austerity — cutting public debt by reducing spending and raising taxes — had reached the limits of public acceptance.

In reality, the shift is more in words than deeds. The rhetoric has changed but there has been no policy U-turn.

The ECB is exploring ways to ease lending to smaller businesses in the hardest-hit peripheral countries of the eurozone. But while it is keeping the liquidity taps to banks open, it has no intention of following the US, British, and Japanese central banks into massive money-printing to try to spur growth.

EU policymakers and central bankers say highly indebted countries will have no alternative to curbing public spending and shrinking the state for several years, however politically unpalatable that may be.

“Growth is the key to getting out of the crisis, we all agree on that,” German Bundesbank chief Jens Weidmann, the ECB’s leading hawk, said in a speech in France last week. “But renouncing budget consolidation will not bring us closer to that objective.”

Barroso’s recognition of the political limits of austerity recalled his predecessor Romano Prodi’s 2002 comment that the EU’s budget rules were “stupid” because they were too rigid.

“While I think this policy is fundamentally right, I think it has reached its limits,” Barroso said. “A policy to be successful not only has to be properly designed, it has to have the minimum of political and social support.”

Governments that implemented austerity measures in Greece, Ireland, Portugal, Spain, and Italy have been turfed out by voters.

Their successors have faced mass protests, rising anti-austerity movements and a steep decline in public support for the EU.

The lesson leaders such as French president François Hollande and new Italian prime minister Enrico Letta seem to have drawn is that they must pursue fiscal discipline by stealth while constantly talking up growth.

The question is whether they are willing to pursue bold economic reforms that loosen job protection, cut labour costs, open closed professions, and change the incentives to work.

The political price of such measures may be high since they disturb vested interests, and the economic payoff may take years to be felt.