Europe's Austerity Debate - English

Austerity's False Promise

By Stefano Casertano1.05.2013Economics

The problem of Southern Europe is a lack domestic demand, not a lack of competitiveness.

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The best way to fix something nobody likes is to propose a solution that does not work: Appearances are saved but the problem isn’t fixed, so it satisfies the haters as well.

For the purposes of this article, the “thing” is the euro. Plenty of fake solutions to the Eurozone crisis have been discussed; enough to write (or re-write) economic textbooks. Opposing each other are the countries of the North (whose economies are still growing) and those sleazy economies from the South. The Northerners have already spelled out their case in detail: They argue that the culprit for the common currency disaster is to be found in the South and its unwillingness to institute reforms. According to them, the path to purification passes through a process of cathartic suffering called “austerity.”

Some have suggested that the biggest challenge for the PIGS (Portugal, Italy, Greece, and Spain) is competitiveness. The formula of success? Exporting more. But the use of the term “periphery” to describe countries like Italy and Spain tells a lot about what is left of Europe and the euro as common dreams. Yet the idea of competitiveness is what matters – a position shared also by those who believe that, in order to gain competitiveness, the PIGS must reduce the prices of goods.

So, in broad terms, the recipe has been the same for a number of years: Put a bit of austerity and a few reforms in a mixer, screw the lid quite tight to avoid social discontent, push the button, and you’ll get a nicely mixed shake of “economic growth.” Yet I have some concerns that the shake will not be as tasty as we might hope.

German bipolar disorder

It is clear that Germany sees problems on the horizon for itself. The German economy shows signs of bipolar disorder: one month is good, the next is bad – and bipolar disorder usually leads to full blown depression, at least economically speaking. Germans can see it coming. The country also suffers from the typical strengths and weaknesses of export-driven economies: GDP grows but relatively few people benefit domestically. Victorian England had a similar problem, by the way. For now, all exports are good as long as they keep the German economy on the (sur)plus side. But what if the countries of Southern Europe really _did_ manage to regain their competitiveness and started exporting more as well?

Italy’s top export products (besides sexual scandals) are mechanical components, not pasta or wine. Even if we subtract exports that benefit German companies (for example, Italian manufacturers might deliver components to Germany, which are then assembled and re-exported to a third country), we can say that a more competitive Italy would also mean more competition for Germany. So when I hear that “Italy should gain competitiveness and export,” well, I think that Germans should be afraid of what they wish for.

Moreover, I am concerned about the fact that exports may really be the Prozac of Southern Europe. Already, the countries of Southern Europe are addicted to exports. Between 2009 and 2012 (according to Eurostat data), the value of Greek exports grew by 76 percent. Portuguese exports grew by 43 percent, Spanish exports by 33 percent, and Italian exports by 28 percent. Germany exports, by comparison, grew by 30 percent.

A lack of domestic demand

The austerity shake does not taste like growth once we start adding in the export supplement. This is true not just for the PIGS: if we consider the first twelve economies of the Eurozone, the 2013 GDP will still be below the level of 2010 – and it has decreased since 2011. At the same time, some of the Northern economies have indeed grown. But money has not been made, but only transferred.

To explain this, some analysts (especially in Germany) have suggested that a decrease in prices due to the economic slump is responsible: crisis countries and their products are on sale at the moment. The idea is that a better way to safety would be a “managed crisis” with the rational suffering imposed by austerity.

But – this is where the unfeasibility of the solution become evident – I cannot help but think that the problem isn’t exports. The problem is a lack of domestic demand. Private consumption in the PIGS is so low that it almost requires life support.

Germans should know this phenomenon pretty well: In 2012, Italian exports to Germany decreased a little bit (-1.1 percent in 2011), whereas German exports to Italy collapsed (-11.5 percent in the same period). If someone thinks that increasing taxes and reducing public spending could foster domestic demand, that person has surely discovered a hitherto unknown truth. Email King Gustav in Stockholm – your Nobel Prize is surely in the making. But, of course, nobody believes in this argument, and King Gustaf will send the mail to the spam folder.

Germans will eventually realize that the big “austerity scam” will fade overnight, possibly after the September 2013 elections in Germany. Once the current government has secured re-election, it will finally be freed from the burden and inefficiencies of democratic campaigning and will enjoy a free hand to propose real solutions – which would be hurtful to Germany as well. For better or worse, austerity is an illusion.

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