What is the logic behind austerity? The
standard explanations given during the last five years do not hold solid
ground. Many – including
famous economists and
central bankers
– had supported budgetary cuts to restore market confidence. Markets,
however, were hardly impressed: operators care about profits – usually
associated with growth – and cuts in the midst of the crisis do nothing
to increase market confidence. Austerity was also justified as a tool to
guarantee creditors; that, too, seems a non-plausible explanation.
In
Spain and Italy, interests rate differentials reached their peak while
the Rajoy and Monti governments were passing draconian cuts and
anti-labour legislations.
Normality was restored only by Mr
Draghi’s famous “whatever it takes” speech. The repeated IMF’s warnings
that the Greek debt is not sustainable suggest that austerity will not
safeguard public creditors either. Austerity-induced recession makes the
public debt dynamic worse – and ultimately impedes repayment. Markets
were aware of this, and did not endorse budgetary cuts. Public
creditors, however, have a different set of incentives from private ones
– as highlighted by the struggle that led to the Third Greek memoranda:
it is geo-politics and not economics that drove the decisions of the
Eurogroup.
To understand the insistence on
austerity, then, one should look no further than the institutional
construction of the European Monetary Union. The EMU is a hybrid system,
a single market without a single government. It is composed of many
different governments, whose actions are severely limited by
international treaties. In such a context, austerity is not so much – or
at least not only – a conservative response to financial and fiscal
crisis. It is, rather, the only tool for crisis management provided by
the existing institutional framework.
European states, particularly the most
powerful ones, want to enjoy the advantages of a single currency without
giving up their sovereignty and, especially, without having to pay the
bills of their partners. This limits any possible alternatives to
austerity. Expansionary fiscal policies are unavailable because the
Eurozone is a monetary union and there are no national central banks to
monetise and guarantee national debts that become unsustainable by
design. Monetary policy, too, is not an option: given the absence of a
central government, the ECB is not allowed to bail out states because
that would mean to switch the debt burden from one state to another, a
geo-politically untenable proposition. In sum, fiscal and monetary
policies alike are restricted because there is a single monetary
authority rather than 19 and this monetary authority cannot intervene
because there are still 19 states rather than one sovereign authority.
Supply-side interventions are the only tool available to maintain a
single currency without a political union.
In many aspects, the EU has re-created a
modern version of the gold standard, an international (multi-national,
in this case) market based on a single currency, unchangeable rules and
quasi-automatic mechanisms of adjustment based on internal devaluations.
Austerity, however, is not only an
institutional tool for crisis management, but also a political action
per se. The gold standard fell mostly because of the impossibility to
reconcile the rules of that international monetary regime – fixed
exchange rate, free movement of capital (and labour) – with the
democratic requests of the 20th century mass society. To avoid the same
destiny of the gold standard, the EU need a credible commitment from all
member states. If every single government were allowed to put national
interests before European ones, the coherence of the EU would be
compromised.
By imposing austerity as the only policy available, the EU
reduce the scope for national governments’ intervention and assure the
coherence of the Union.
Read more: Explaining The EU's Politics Of Austerity
