The Politics of Austerity

I hate to sound like a broken record here, but I believe the anti-austerians have it all wrong about the politics of austerity in Europe. Everywhere I look, there is some analysis that takes the statements of policy makers and big investors as evidence that we are seeing a paradigm shift away from austerity. Don’t believe it. It isn’t true. The only thing we are seeing is the move from front-loaded to back-loaded austerity. It is an attempt to meet the facts on the ground within the existing economic paradigm, nothing more.

For example, a lot of people are making a big deal out of bond guru Bill Gross’ attack on austerity in Europe. Business Insider plays this up with its usual overstated headline. But Gross has not changed his tune at all. Look at Bill Gross circa 2011 talking up jobs and growth in this video or Gross talking up the job guarantee idea in this video. It’s clear from both of those videos that Gross is saying pretty much what he was saying in 2011. It’s merely the context in which he is saying it that has changed. The politics of austerity are tilting away from austerity and so people perceive his statements in a different light.

Then there is the Jose Manuel Barroso statements against austerity yesterday. I reported on this, noting that the data showing deepening recession with austerity. And here’s what Barroso said in that context: “We haven’t done everything right … The policy has reached its limits because it has to have a minimum of political and social support.”  What he didn’t say is that austerity is wrong. Barroso never actually repudiated austerity. In fact, he said just the opposite. “we have done everything right”. Yet, people are acting like the man has just slammed the door shut on austerity.

I hate to be the bearer of bad news, but I have to pour cold water on all of this. Politics just don’t work this way. The changes we are witnessing are exactly the kinds of changes you would expect as a student of the political economy. This is how I put it in September after the OMT program was announced:

“Unfortunately, policy inertia is such that there is only so far that European policymakers are willing to move in order to accommodate circumstances on the ground. That’s the reality of the psychology of change. And this will limit how far Europe will go every step along the way. The object of European policy is to move as little as possible from previous policy choices and ideological stances while making some sort of meaningful adjustment to meet the situation on the ground and avoid crisis escalation. Each move policy makers make is in this vein – and this will continue to be the way policy is designed.”

Austerity in Europe will continue. But targets will be relaxed to give countries more breathing room. And the only reason policymakers are doing this is because they have to. As Barroso told us “political and social support” for recession-inducing economic policy has reached the end of the line. To accommodate this, policy will move toward back-loaded austerity. But fiscal consolidation will still be the goal right across Europe. That much, you should count on.