Views | The EU’s fiscal crisis: The paradox of austerity

One of the broader lessons of the European Union’s (EU’s) financial crisis is that a consistent track record of fiscal responsibility is the ideal foundation for a nation’s long-term economic stability.

So it is that the profligacy of Greece has only borne its citizens a damaging loss of self-image and economic ruin while Germany readies itself to act once again as Europe’s lender of last resort. Yet in the past few weeks, as the eurozone struggles to come to terms with its myriad inadequacies and the upheaval in Greece, there is a risk that hard truths may be conveniently overlooked. In some quarters, there is now a hardening of opinion that suggests that a recent focus on austerity is to blame for a continent’s elusive growth. But as seductive as this line of enquiry is, it is ultimately flawed. It assumes that growth and austerity are mutually exclusive. Yet far from being so, a commitment to fiscal prudence is a necessary precondition for sustainable growth. As governments across Europe strive to come to terms with the crisis, the underlying issues ought to matter to policy makers elsewhere too.

It is now clear that what was initially viewed as a financial crisis has morphed into a wider crisis of legitimacy for a centralized European project. In recent elections, the Greek electorate was asked to bless a cocktail made in Brussels and it emphatically rejected the concoction. When Greek democracy met a determined ‘Eurocracy’, unlike the movies, it did not translate into a happy union for both parties.

The latest triumph of street opinion in Athens may have served as a public vent for its long standing frustrations. But ironically, democracy’s message was not greeted with cheers in Brussels. Nor were the Greeks welcomed for speaking aloud. Instead, the immediate by-product of this democratic ‘debacle’ lay in the spectre of contagion making itself known in Spain and Italy. It has given way to a continent twitching nervously, uneasy and unsure of what might come next.

The big question is how might this morass be resolved? Yet in order to attempt a lasting solution to the eurozone’s structural difficulties, it is critical to acknowledge how this problem arose in the first place. The plain truth is that the eurozone crisis has lain threadbare the manifest contradictions residing at the core of the European project. A single currency club of members with divergent social traditions being hitched together without fiscal oversight was always likely to flounder in the long run. Economic sense pointed to the futility of pretending that with a single currency, Greek levels of public spending could miraculously turn into a version of German prudence and that Germans could be encouraged to behave a bit more like high spending Greeks.

The markets and the real world do not work in this idyllic revenue neutral way. But political considerations held sway with the consequences being felt today. Rather than promoting responsibility, the protective balm of a single currency promoted irresponsible public spending in most of the eurozone states. What comes through is that a strategy premised on reckless members strengthening themselves at the expense of the prudent ones was never truly a sustainable one.

The real truth is that a European response to the crisis appears to promote centralization when the democratic impulses of many citizens are headed in the opposite direction. To be sure, in order for the eurozone to emerge from this crisis with a long term solution in mind, a fiscal union among its surviving members would be essential. But for this to take place with credibility, such a union must necessarily draw potency from a democratic mandate too. This is not to overlook the crucial role that the EU plays in promoting free trade within a single market of 27 members. It is also important for the EU to speak in a cohesive voice at global platforms, particularly when dealing with a rising power such as China. That said, a bureaucratic vision of a ‘United States of Europe’ represents a pipedream to most ordinary citizens.

In the short term, the real challenge before governments across Europe lies in balancing the imperatives of austerity with a message of hope for the electorate. The paradox of austerity is that too much of it in the short term is likely to spook the public but too little of it would spook the markets and be hazardous in the long term.

From an Indian perspective, this debate ought to matter considerably too. The UPA’s penchant for fiscal profligacy does not sit easily in a climate of global economic uncertainty and rising food and oil prices. But it will have to take difficult decisions while balancing public sentiment. Otherwise, avoiding politically awkward choices is unlikely to enhance its credentials when seeking a third successive term in office.

Returning to the crisis in Europe, as its leaders contemplate urgent choices in the days ahead, they should resist the temptation to see this as a battle between growth and austerity. These are not binary values. Admittedly, the here and now matters too. But for the EU’s long term growth, prudence is an essential ingredient. Forgetting this would run the risk of repeating mistakes of the past. It is a lesson that governments in the EU and elsewhere would do well to remember.

Rishabh Bhandari is a lawyer based in London. He also writes on subjects that include British and Indian social, political and economic affairs.