29 April 2013

Simon Nixon: In place of austerity - What comes next?

As the anti-austerity debate in the eurozone heats up, WSJ's Nixon argues that governments should use the opportunity to introduce more structural reforms rather than use it as an excuse to stop reforms.

The eurozone's misfortune is that its political leaders have allowed the vital structural overhauls needed to restore growth to become conflated in the public debate with the necessary fiscal adjustments needed to curb borrowing under the toxic label of austerity. This has allowed vested interests to pose as populists while obstructing reform of broken economic and political models.

Breaking this link in the public mind between fiscal measures and supply-side overhauls is an urgent priority. Does it matter whether the eurozone allows governments an extra year or two to bring deficits back to levels required under the fiscal compact? Hardly: the rules contain sufficient flexibility and, with debt levels so high, markets are unlikely to worry about a few extra percentage points of borrowing.

What matters—and what will concern the markets—is that crisis countries use the political space created by any easing of targets to push ahead with structural overhauls.

Of course, structural reforms can often be politically even harder than fiscal consolidations. But with unemployment in Spain and Greece now over 25 per cent and youth unemployment over 50 per cent, political leaders have a responsibility: No one can blame them for failing to rekindle the Spanish construction boom or sustain Greece's crazy public-sector expansion; but they can be blamed for failing to create the conditions for economies to rebalance and viable companies to create new jobs.

Do Mr Letta, Mr Rajoy and France's President François Hollande—and other leaders behind the austerity backlash—really have the stomach to take on vested interests, break down barriers to entry, cut unnecessary regulations, speed up bureaucracy, re-skill the unemployed, improve the life chances of the next generation through better schools, and ensure an adequate supply of finance to support growing businesses via a restructured and recapitalised properly functioning banking system?

If the eurozone uses this period of ECB-induced market calm to repackage tough choices in a more politically palatable way, then some good may yet come of this antiausterity backlash. But if instead it confirms the fears of those who warned that governments would use any ECB intervention to abandon essential structural reforms, then this period of calm may not last too long.

Full article (WSJ subscription required)

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