30 January 2012

Javier Solana: Austerity vs Europe

Ominously, the same arguments that turned the 1929 financial crisis into the Great Depression are being used today in favour of austerity at all costs. We cannot allow history to repeat itself, writes Solana for Project Syndicate.

It is now increasingly clear that what started in late 2008 is no ordinary economic slump. Almost four years after the beginning of the crisis, developed economies have not managed a sustainable recovery, and even the better-off countries reveal signs of weakness. Faced with the certainty of a double-dip recession, Europe’s difficulties are daunting.

Not only is Europe running the risk of lasting economic damage; high long-term unemployment and popular discontent threaten to weaken permanently the cohesiveness of its social fabric. And, politically, there is a real danger that citizens will stop trusting institutions, both national and European, and be tempted by populist appeals, as in the past. Europe must avoid this scenario at all costs. Economic growth must be the priority, for only growth will put people back to work and repay Europe’s debts.

Political leaders must take the initiative to avert an economically-driven social crisis. Two actions are urgently needed.

At a global level, more must be done to address macro-economic imbalances and generate demand in surplus countries, including developed economies like Germany. Surplus emerging market economies must understand that a prolonged contraction in the developed world creates a real danger of a global downturn at a time when they no longer retain the room for maneuver that they had four years ago.

Within the eurozone, structural reforms and more efficient public spending, which are essential to sustainable long-term growth and debt levels, must be combined with policies to support demand and recovery in the short term. The steps taken in this direction by German Chancellor Angela Merkel and French President Nicolas Sarkozy are welcome but insufficient. What is needed is a grand bargain, with countries that lack policy credibility undertaking structural reforms without delay, in exchange for more room within the EU for growth-generating measures, even at the cost of higher short-term deficits.

The world is facing unprecedented challenges. Never before in recent history has a deep recession coincided with seismic geopolitical change. The temptation to favour misguided national priorities could lead to disaster for all. Only enlightened political leadership can avert this outcome. European leaders must understand that adjustment programmes have a social as well as a financial side, and that they will be unsustainable if those affected face the prospect of years of sacrifices with no light at the end of the tunnel.

Austerity at all costs is a flawed strategy, and it will not work. We cannot allow a misconceived notion of “discipline” to cause lasting damage to our economies and inflict a terrible human toll on our societies. All of Europe must agree on a short-term growth strategy – and implement it quickly.

Full article

© Project Syndicate