Cause and Effect in European Politics and Law

Austerical* Crisis in Europe

Ralitsa Kovacheva, May 4, 2012

The word austerity is so deeply rooted in my dictionary that I do not even think how to translate it into Bulgarian. There is simply no sufficiently eloquent equivalent. And since the word has become popular also in terms of corporate and family budgets, I have come to the conclusion that everything is clear and there is no need to translate it. Indeed, the policy of austerity, i.e. cutting spending in order to reduce the budget deficit, has its roots in the everyday family economy. What does a household do when incomes fall – it shrinks spending. It is rather self-preservation instinct than rational economic behaviour, based underlying well-known theories. The wise saw teaches us to cut our coat according to our cloth.

Thus we accepted it somehow naturally, when the European countries, having met the dawn with huge debts and deficits after the financial crisis, have switched to austerity-mode and started to cut costs. Especially after we heard some staggering stories from Greece for example, where, judging by the number of salaries, a year has not 12 but 18 months, dead men receive pensions and lawyers declare lower incomes than tailors. Two years later, there is austerity-fatigue in Europe because, as you know, the Europeans get tired quickly - we have been talking for long about enlargement fatigue, reforms fatigue, single market fatigue, cohesion fatigue (in terms of convergence of poorer and richer countries in socio-economic terms).

Against "austerists" (after Paul Krugman) new Keynesians have risen, claiming that states should not save but spend in order to boost economic growth. Voters in France and Greece now, and in the Netherlands in the autumn, will vote exactly in favour of or against the austerity-policy, which some politicians and analysts have inexplicably opposed to growth, without explaining how precisely the governments will find money for investments (in what exactly is a separate conversation), if they have to pay increasingly higher interest rates on their debts.

The battle between the two camps has totally confused the ordinary citizen, who on the one hand is also in a budgetary constraints mode, but on the other - he would like to have the generous welfare-mother-state back, that would take care of everything. It is normal citizens to be keen on that idea - instead of applying austerity measures, the state to lift up the economy and create jobs. However, nobody has found the fulcrum of the lever yet that will lift the economy. The EU has proposed various programmes for artificial employment, websites for job search and initiatives such as "Lifelong Learning". The call for investment in science and education is praiseworthy, but this will bear fruit only after years, moreover, it is not guaranteed. Investment in infrastructure will likely give a temporary livelihood to thousands of low-skilled workers, but how does this meet the ambitions for creating a sustainable and highly productive employment, especially for young people? And people (as well as the markets, the analysts would remind) expect prompt results.

Because, as claimed by both sides in the dispute about austerity and growth, confidence must be restored. We have been listening the mantra of confidence for so long that we do not believe it at all. The markets were supposed to restore their trust in the euro area in order to stop increasing the interest rates on loans. This was supposed to happen by demonstrating strict budgetary discipline. But it did not happen. Now they argue that trust will return through investment in economic growth. However, the markets do not believe the promises.

But who are the markets with which the European leaders justify all their fears and desperate moves? These are businesses, these are politicians, and citizens - all of us, our fears, expectations and irrational behaviour, masked behind the impersonal definition of "markets". This means that in order to restore confidence, these parties have to trust each other, therefore they must reach consensus about the right direction. In other words, when it is decided to cut spending politicians need to really be willing and able to do so, the economic and financial players must be ready to react without speculating, and the citizens - to work more, instead of protesting. Neither party has fulfilled its part of the deal properly.

Politicians cut spending, raise taxes, increase retirement age, but they do that so reluctantly and awkwardly that no one believes them. The biggest burden on budgets are pension, social and health care systems, where no one can cut easily and painlessly. Europe`s pride - its social model - proved to be the Old Continent`s "Titanic", where both politicians and citizens chose to dance on the deck instead of saving the sinking ship. Because, as Luxembourg's Prime Minister and Eurogroup President Jean-Claude Juncker once said, we all know what to do, we just don't know how to win the election afterwards.

What neither budget discipline supporters nor growth champions like to talk about is reforms. Because they know that truth will not appeal to voters. Instead of pretending to be an omnipotent business player, the state should retrench the tentacles of overregulation at all levels and in all areas to enable businesses to create jobs and growth. The red tape, the omnipotent (and in some places incompetent and corrupt) administration, the super powerful trade unions and overprotective labour laws are the main challenges facing both individual countries and the EU as a whole.

As well as the financial sector regulation. Because, although we have been listening about the reform of the rules in financial sector and supervision for two years, it still has the size and power of a parallel universe and does not seem affected by what is happening. Yes, some have lost millions and others were "bailed out", and financial sector`s recovery keeps costing dearly to the governments - the latest example is Greece, and Spain is already coming along. The French banks are mentioned only under breath. But the entire operation is sill paid by the taxpayers who no longer trust the politicians and moreover, they do not trust the system. Spain’s "Indignados" and the "occupiers" from the Occupy movement, that started from Wall Street, but has spread throughout the world, are only the brightest bursts of distrust.

European politicians are wrong to say that they must regain the markets' confidence – they must regain the trust of citizens. Moreover, not by trying to bribe them, mitigating the need for cutting costs and implementing difficult reforms, but by telling the truth and demonstrating real effort. As it became clear many times during the Greek drama, only a broad political and public consensus can ensure the implementation of the painful but necessary measures to get the economy back on track. Whether this will be achieved, we will see after the elections on 6 May.

However, this must be done not only in Greece but in all European countries, both individually and at the European level. Only if all political forces work together to implement the necessary reforms and against populism, if they explain to the voters why they must do one thing or another, instead of excusing themselves with the "bad Brussels ", they might be at least better understood if not loved. Because, no matter how much they like the idea, the citizens are aware that there is no free lunch. What they do not like, however, is some people to pay others` bills. There is the key to confidence, which politicians have to find.

*Combination of hysteria and austerity - policy of budget cuts to reduce deficit