Friday, February 12, 2010
Now, the fact is that even right-wing commentators are astounded at the austerity measures being imposed on Greece, without any hint of support. It's not just the Krugmans and the Stiglitzs who are appalled. Martin Wolf of the FT, ordinarily a reliably conservative opinionator, advised that it would be insanity to force Greece to accept austerity measures, and urged European governments to bail out Greece and stimulate demand across the continent. Even Ambrose Evans-Pritchard, the reactionary business and economics columnist for the Daily Telegraph, was scathing on the topic. Their case is simple, and persuasive: Greece and other southern European economies experienced private sector booms as a result of deceptively low interest rates in the Eurozone. Hence, consumers could borrow and spend way more than they had earned in income. The credit crunch threatened those economies with catastrophe unless governments intervened to sustain demand. But that has now led to huge deficits coupled with sky-high debt. To force them to cut state expenditures at this point would be to invite the same catastrophe that loomed when the credit crunch began - a devastating slump in demand, soaring unemployment rates, a possible default on loans, with a predictable continent-wide impact. Only a bail-out, with low interest loans extended to Greece and other countries in the same situation could help
The signs are that the Eurozone is in deep trouble, and the British economy is unlikely to be exempted from this process. The UK has a high debt to GDP ratio, Niall Ferguson, presently enjoying a concupiscence with the Dutch-Somali neoconservative Ayaan Hirsi Ali, goes further and opines that the debt crisis will befall America next, because of the high deficits run up to sustain demand. You don't have to accept his 'free market' perspective to understand that there's a real problem here. If the deficits remain high and investors "lose confidence" in the ability of European governments to repay their loans, then the interest rates soar, and governments end up spending a sizeable portion of new wealth produced on servicing the debt. Greece is already paying about 5% of its GDP per annum on interest charges. That means that productive wealth is being sucked out of the economy and poured into the coffers of bond and gilt traders, and over the medium term it threatens any recovery that might emerge. To pay off the debts with fiscal austerity, though, is also to threaten recovery. To the extent that these trends are replicated elsewhere, then they pose the same dilemmas. Of course, national governments outside the Eurozone can theoretically devalue their currency in the hope of making exports cheaper and imports more expensive, thus hopefully stimulating their economies and building up the tax base to balance the budget. But the UK would find it difficult to do this, since that would hurt the City, and it would drive up yields on government bonds. The manufacturing sector is fucked anyway, short of a national public works campaign. And America would like to do it, but it is now having to compete with China over currency devaluations, and China is winning.
Now consider that the small Brown bounce in the polls follows a GDP increase of just 0.1%. Consider all the tax cuts, the interest rate cuts, the quantitative easing, the brought forward public spending, the bank bailouts. This has been a hugely costly rescue plan, and the government has made it clear that it will be paid for mainly by the working class, and especially by public sector workers (notwithstanding small tax increases for the very well off). If the economy goes under now, then the government's last chance is blown. It doesn't matter that the Tories are worse, and that their strategy would hurt workers' living standards quite considerably. The anger will just overwhelm the government. So, if New Labour's line is going to be "our strategy has worked and the Tories' cuts will ruin it", then they need to cash in on it before the crisis resumes with force.