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Austerity vs. growth

Ralf Bosen / aiApril 25, 2013

In light of disappointing economic data, the discussion about the right policy to combat the crisis continues. There's growing pressure on Germany to accept an end to its austerity-first policy.

Image: Fotolia/PA

Whenever there was talk of how to combat the financial crisis over the past few years, the credo has always been the same: austerity, austerity and even more austerity. Cutting expenditures was seen as the way to go when the economy ran into trouble.

The countries that had to go to Brussels and ask for a bailout had, in return, to promise to watch every euro in their budgets. Germany, in particular, insisted on budgetary discipline and pushed that policy on southern European states that thought investment rather than austerity was the better recipe for recovery.

Record unemployment

Now, however, there seems to be a change of direction. More and more politicians are openly criticizing the reliance on austerity. In addition to the hundreds of thousands of people protesting in southern Europe, economic data just doesn't seem to show a recovery in the making.

Demonstrators in Spain (photo: dpa)
People in southern Europe are up in arms against the calls for austerityImage: picture-alliance/dpa

Unemployment in the eurozone has risen to a record high of 12 percent, growth hasn't taken off and investors have steered clear of any country in trouble. By the end of 2012, the economy had contracted over five successive quarters. Most economists expect yet another contraction for the first quarter 2013. The International Monetary Fund (IMF) also said it expects a negative trend for 2013.

Barroso wants growth

European Union politicians took note of all these pieces of data. EU Commission President Manuel Jose Barroso made headlines this week when he pushed for spending to promote growth.

"What we need is sustainable growth based on a stronger competitiveness of Europe," he said.

In this sense he applauded the efforts of Greece, Portugal and Spain to reduce their debt. These were necessary, he said, but now should be supplemented with measures aimed at generating growth - both short and long-term.

Barroso underlined that the policy of the EU Commission was not just aiming to cut deficits but also to balance public finances as the only way to regain trust. And without trust there would be no investment and therefore no growth. "Our answer to the crisis, our political suggestions, have always been a comprehensive answer."

European Commission President Jose Manuel Barroso (L) and European Council President Herman Van Rompuy (photo: REUTERS/Eric Vidal)
Both Barroso and Van Rompuy cautiously called for a slight shift towards more investmentImage: Reuters

Barroso didn't take a new stance in calling for more growth without providing details of how countries should do it, and at the same time he also did not call for an end to austerity. But the fact that he did call explicitly for growth measures is seen by some observers as a quiet departure from the austerity policy.

Westerwelle warns over return to debt

Barroso received support from EU Council President Herman Van Rompuy who presented a rather gloomy outlook. "Early in the crisis we managed to secure more time, more breathing space - for Greece, for Ireland, for Portugal." It was going to be tough, but it seemed like those countries would make it. Now though, Van Rompuy pointed out, the feeling among some was that the situation wasn't getting sufficiently better.

"This means we need more immediate measures to directly support job creation and economic activity," he said. "It's important to move faster on the reforms with the biggest immediate growth impact."

It didn't take long for reactions to come in - especially from Germany. Foreign Minister Guido Westerwelle warned at the end of a NATO meeting in Brussels of a return "to the old policy of making more debt." That way, mass unemployment would remain a problem for years to come. "Growth can not be bought with making new debt," and growth and consolidation were two sides of the same coin, Westerwelle said.

Buying into an illusion?

German economists also warned against an early end to austerity.

"I think Mr. Barroso would be well advised not to forget the pressure that finance ministers across Europe have to operate under," Heribert Dieter of the German Institute for International and Security Affairs in Berlin told DW. "Europe has no chance to return to a path of sustainable growth if it buys into the illusion that there could be a stable economic development without austerity."

German Chancellor Angela Merkel and Finance Minister Wolfgang Schaueble (photo: REUTERS/Fabrizio Bensch)
German Finance Minister Schäuble and Chancellor Merkel insist on sticking to austerityImage: Reuters

The head of the Cologne Institute for Economic Research, Michael Hüther, also said he does not think there's a need to be a readjustment of the EU's financial policy. This was in part, because there were positive impulses from the German economy that would assist the rest of the bloc. In an interview with German public broadcaster Deutschlandfunk, he added that it would make sense to give struggling countries more time to consolidate their budgets.

Growing pressure on Merkel

But last week, the IMF demanded the tight grip of austerity to be somewhat loosened. Similar statements are also coming from governments outside the EU who fear that too much austerity in Europe will slow down the recovery of the global economy and could even lead to a contraction. The advice is nearly always directed at Germany, calling for Berlin not to block any departure from the path of austerity.

German Chancellor Angela Merkel is unlikely to be isolated on economic issues should even more criticism come from Brussels and beyond, according to Dieter. Germany, he said, was not alone in its position but had backing from the populations of several northern European states.

Spanish Finance Minister Luis De Guindos Jurado (photo: PETER MUHLY/AFP/Getty Images)
Luis De Guindos Jurado has already announced a shift away from austerity-first policiesImage: Peter Muhly/AFP/Getty Images

"If you postpone the cuts, then there's the danger that you end up like Japan - a country that again and again postponed efforts to get its budget in order and that now is sitting on a fiscal time bomb," he said, adding that Germany was right not to waiver from its path.

Spain wants more spending

The countries suffering most from the eurozone crisis took a different view. In Spain, for instance, there's less readiness to accept more austerity. The country's finance minister, Luis de Guindos, announced that the budget proposals his government would present this week would focus more on economic growth and less on cuts.

"What we're aiming for is a better balance between cutting the deficit and fostering economic growth," he said. It's a statement very close to what came from Barroso and Van Rompuy in Brussels.