The failure of austerity in Europe

The Don Dunstan foundation (with which I have an affiliation) has released a report by Dexter Whitfield, Director of the European Services Strategy Unit, giving chapter and verse on the failure of austerity policies in Europe. It starts with the failure of austerity in terms of its own objectives (reducing debt), and then covers the various consequences, including

The only point I want to make, yet again, is that (with the partial exception of Greece) the debt crisis to which austerity has been the response was not the result of government profligacy. It was caused by the Global Financial Crisis which, in its European dimension, was generated by the policies of financial deregulation, fixed fiscal policy targets and inflation-targeted monetary policy adopted by the European Central Bank and the European Commission – the very institutions that are now imposing austerity.

30 thoughts on “The failure of austerity in Europe

  1. Ikonoclast
    Really precious piece of writing you present today. Moreover, it is consistent use of verbiage that makes it easy to comprehend which most of the professional economists lack.
    Just one small thing, it is the rise in wages (incomes) that rises inflation, most of the times. There is one time that price of energy drove inflation.
    Rise in wages allow for more credit creation which translates in higher prices and that then again pushess wages up (that is if there are unions to achieve that).

    Allowing for inflation means allowing the rise in wages, so this sentence; “And with 4% price inflation, wages should be permitted to inflate at 4% also.” is a bit inconsequential.

    All in all, it is a nice gem to have and to spread comprehension of economics to masses.

  2. @Ernestine Gross

    Yes, I have misconstrued you again and we are talking at cross purposes. A considerable amount of the fault must be mine as I muddle along as a layperson who imagines he can debate with professional and/or academic economists. JQ has certainly taken to ignoring me completely and putting myself in his shoes I can understand why.

    I am not sure why you don’t directly address my argument that political union must precede currency union for overall reasons of Political Economy. Unless you have addressed it obliquely by saying you don’t subscribe to grand narratives. However, I have offered cogent reasons (I believe) why a political union is required to allow a currency union to occur that can reasonably approximate an OCA (Optimal Currency Area). To recap, a fully democratic union or federation (like Australia) offers;

    1. Full democratic federal parliamentary control to the entire polity affected by the the currency union and the attendent need to be responsive to the needs of all regions of that polity.
    2. Full soveriegn control of the fiat currency.
    3. Full soveriegn control of fiscal and monetary policy.
    4. Full powers to makes horizontal fiscal tranfers as appropriate.

    With political union all these functions are with the federal Parliament. Without full political union these powers are delegated to a supra-national undemocratic or quasi-democratic body at best and the fiscal and monetary policy is run by econocrats (read neoliberal capitalist bankers and their mates).

    You talk about institutional settings at times and the effect of these on economics. In addition to the above illustration, a prime example is the set of laws, institutions, practices etc. enabling the current model of corporatism in Western or at least Anglophone economies. An even more fundamental example is the overall system of ownership and money and labour relations in our society, namely capitalism itself. I keep harping on, at times, about the fact that the subject we should be studying and debating is Political Economy not Economics. Strictly speaking there is no such thing as pure Economics except perhaps economics as a sub-discipline of Political Economy in the areas of econometrics, macroeconomics, business economics and so on. These sub-disciplines are all conditioned by Political Economy. The macroeconomics of Feudalism (if such can be said to exist) are different from those of State Capitalism (the old Soviet Russia) are different from those of mixed economy capitalism and so on. Macroeconomics without a gold standard and with floating exchange rates is different from macroeconomics under a gold standard with fixed exchange rates.

    Microeconomics is a large set of intricate academic exercises usually with little relationship to the real world. Too many simplifying assumptions need to be made to get the formal models. Agency as volitional, learning, complex, evolving behaviour and the general issue of emergent phenomena introduce too many variables and unknowns for micro-economics to become a science. Not to mention institutional arrangements (which are forms of emergent phenomena) conditioning the whole complex system.

  3. @Ikonoclast

    The topic of this thread is “Failure of austerity in Europe”. While our host is very tolerant, I do believe we should show respect by not derailing threads.

  4. SJ, no need to apologise – happens to, maybe not all of us, but surely to me (remember the COD). Nice of Jordan though to clarify so quickly.

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