May
brought home to the world evidence of the popular
rejection of the irrational pursuit of austerity amidst
recession in Europe and elsewhere. One telling signal
was the victory of Francois Hollande in the French
Presidential run-off, making this the first presidential
victory for the Left since 1988 and only the second
occasion when an incumbent French president has not
been re-elected. Nicolas Sarkozy's defeat may partly
be the result of his excessively flamboyant style
and arrogance. But it is largely the consequence of
his willingness to collaborate with German Chancellor
Angela Merkel in pushing for fiscal consolidation
across Europe and imposing austerity on countries
whose public debt levels were arbitrarily declared
as unsustainable.
The country that was the worst sufferer of this economic
philosophy that lacks rationale in the midst of a
crisis was Greece. Burdened with austerity ever since
the first bail-out agreement in 2010, Greece has not
only seen incomes and output shrink dramatically,
but is also experiencing an unemployment rate of 22
per cent, with one in every two jobseekers under the
age of 24 unemployed. The austerity measures were
ostensibly aimed at reducing Athens' debt from 160
per cent of GDP to 120 by 2020, through cuts in wages,
pensions, healthcare, public sector employment, and
much else. But with the austerity slowing growth,
revenues have been falling short as well, making it
near impossible to meet staggered debt-reduction targets.
The bailout has failed.
The bailout was actually designed to help private
finance capital. Access to credit from Eurozone governments,
the European Central Bank and the IMF prevented the
repudiation of private debt and an exit of Greece
from the euro. In 2010, before the first bailout agreement,
Greece owed about 310 billion euros, almost wholly
to the private sector. According to the Greek Debt
Management Office's estimates, Greece now owes 266
billion euros, of which close to 75 per cent is owed
to the European Central Bank, Eurozone governments
and the IMF. While there is talk of a greater than
50 per cent haircut taken by private banks, the real
outcome has been a huge swap of private debt for official
debt.
The cruel cut was that this redistribution in favour
of financiers who had lent to Greece without diligence
had at its other pole severe austerity. That this
would be unacceptable was known. Hence, when former
Prime Minister George Papandreou announced on 31 October
2011 that the government would hold a referendum to
assess popular support for the terms of the bailout
agreement, the response from the counterparties to
the bailout was aggressive. The move, which was seen
as a means to scupper the bailout deal, was attacked
both within and outside Greece. This led to its withdrawal
and the resignation of Papandreou as Prime Minister
ten days later. Clearly, democracy was not seen as
a suitable environment for implementing the austerity
presented as a prerequisite for restoring confidence
and kick-starting growth.
Elections were also postponed for long so as to allow
an unrepresentative ''national government'', in the
form of an opportunistic coalition between the centre-right
New Democracy and the PanHellenic Socialist Movement
(Pasok), to obtain legislative sanction for the austerity
measures. The intention was to accede to the demands
of the German and French governments, the European
Central Bank and the IMF, even though protestors clashed
with police outside parliament while the details of
the austerity package were being debated and made
into law.
But the elections had to be finally held. And they
have left the erstwhile ruling coalition short of
a majority, with the New Democracy winning 19 per
cent of the vote and 108 (out of 300) seats in parliament
and Pasok garnering 13 per cent of the vote and 41
seats. What is remarkable is the showing of Syriza,
the Coalition of the Radical Left, which came in second
with 17 per cent of the vote and 52 seats. In the
October 2009 polls, Syriza had won just 4.6 per cent
of the vote and 13 seats. The vote was clearly a rejection
of the two leading two parties that had come together
to accept and implement the austerity agenda in return
for bailout funding.
Anger against austerity has also led a good showing
by the Ultra-right and neo-Nazi Golden Dawn Party
that reportedly advocates forcing immigrants into
work camps and planting landmines along the Turkish
border. The party has won 6.9 per cent of the vote
and 21 seats in the Greek Parliament.
But with two seats short of a majority the coalition
led by New Democracy has little chance of forming
the government, since it is committed to both staying
with the euro and continuing with the bailout policies.
The one party that could have helped form a new ''national
government'', the Democratic Left, which has won 19
seats, is committed to the euro but campaigned for
a reversal of austerity measures. Thus barely a day
after he began his effort to forge a new coalition
in favour of austerity and the euro, New Democracy
leader Antonis Samaras, gave up his bid to form the
government. The next to get the opportunity is Alexis
Tsipras of Syriza, who needs to forge a left coalition.
His declared objective is to scrap the austerity measures.
In Tsipras' view, there cannot be a government of
''national salvation'' to implement austerity, since
such austerity amounts not to salvation ''but tragedy
for the people and the place''. "The parties that
signed the memorandum now form a minority. Their signatures
have been delegitimised by the people." Tsipras
is reported to have said.
The political rejection of austerity is visible in
France as well. Immediately after his election Hollande
declared that his election signalled that ''austerity
does not have to be inevitable'' for Europe. That is
significant, especially since his campaign promises
included higher taxes on business and the rich, employment
subsidies, and a partial reversal of the rise in the
retirement age to 62.
There is therefore some hope that the world would
see a retreat from an unthinking commitment to fiscal
conservatism. But the transition would be difficult
and divisive. Merkel has already warned Athens, grappling
with finding itself a government, that it would have
to stick to the reforms and budget targets agreed
with lenders in the bailout deal. But this is not
good for Greece, for Europe or the rest of the world.
The evidence is too clear to ignore. Four and a half
years after the onset of the Great Recession, the
expectation that the world economy is on the path
to recovery is being belied. The signals are many.
To start with, the GDP growth in the 27 countries
of the European Union has fallen from 2.4 per cent
in the first quarter of 2011 to 0.8 per cent in the
last quarter, according to the OECD Secretariat. Moreover,
5 out of 33 OECD countries (excluding Greece) had
recorded negative rates of GDP growth in the last
quarter of 2011. These are: Italy, Japan, the Netherlands,
Portugal and Slovenia. The United Kingdom too is faring
poorly, recording GDP growth of 0.5 per cent in the
last quarter of 2011 and zero per cent in the first
quarter of 2012.
The problem does not end here. The expectation of
a recovery had been bolstered by evidence that the
recession in the United States had touched bottom
and begun to reverse. Both GDP and employment were
being quoted as evidence of this. But it now seems
that the recovery may be losing steam. Though the
first quarter of 2012 saw GDP growing at 2.1 per cent,
as compared to 1.5-1.6 per cent in the previous three
quarters, this was below the 2.2 per cent recorded
in the first quarter of 2011 and way below analyst
expectations of 2.7 per cent. On the employment front,
the 115,000 jobs added in April were just adequate
to keep pace with population. The unemployment rate
has fallen to 8.1 per cent in the US only because
less Americans are coming onto the job market being
disillusioned by past failure to find employment.
Finally, it is not just US, the one bright spot in
the OECD, which disappoints. Countries such as China
and India that were seen as pulling up the world economy
because of their rapid growth are also slowing. China's
growth slowed to 8.1 per cent in the first quarter
of 2012, according to the country's National Bureau
of Statistics. This compares with the 8.9 per cent
recorded in the last quarter of 2011, and is the slowest
achieved in the last 11 quarters. The government has
reportedly lowered its growth target for 2012 to 7.5
per cent, as compared with 9.2 per cent last year.
In India too, the Central Statistical Organisation
has estimated growth in GDP during 2011-12 at 6.9
per cent as compared to the 8.4 per cent recorded
in 2010-11.
The reason for this prolonged and widespread slowdown
and its intensification into a recession in certain
segments of the world economy is the irrational fiscal
conservatism that has overcome most governments. Having
spent hugely to rescue finance from bankruptcy, these
governments have turned wary about the state of their
finances. So the argument doing the rounds, aided
and abetted by the IMF, is that it is time now for
fiscal consolidation in which governments must cut
expenditure and reduce their deficits in order to
bring down their public debt to GDP ratios.
The reason why spending cuts in the middle of a recession
are seen as making good sense is flimsy to say the
least. Improved fiscal positions and reduced government
debt is expected to improve ''investor'' confidence,
leading to more international investments and credit
and a revival of demand and growth. However, the reason
why investors should feel confident when economies
are languishing in a recession is never made clear.
And the evidence that they don't is ignored. Consider
a country like Ireland, which has been a disciplined
student of the ''austerity for confidence'' school.
Having recorded a negative 0.4 per cent growth in
GDP in 2012, Ireland grew by just 0.7 per cent in
2011. And growth in the last quarter of 2011 was just
a little above half that in the second quarter. Other
countries that have been experimenting with the contradictory
austerity-induced revival strategy, such as Greece,
Portugal, Spain, Italy and the UK have also been disappointed,
as was to be expected. Nowhere is the turn to austerity
as severe as in the peripheral countries of Europe.
So the political backlash had to begin there. But
with France showing the same tendency, the popular
mood is difficult to dismiss. Hopefully this would
restore some balance in economic policy making across
the world.
*
This article was originally published in Frontline,
Vol. 29: No. 10, May 19 - Jun 01, 2012 and is available
at
http://www.frontlineonnet.com/stories/2012060129
1004200.htm
