Beware the debt and deficit trap and the European mistake. John Menadue

Economy, Politics

Beware the debt and deficit trap and the European mistake. John Menadue

Jun 21, 2013

The Europeans may at last be breaking free of the debt and deficit trap that has caused so much social and economic damage across Europe. Even the IMF is at last challenging the austerity mindset that took hold in Europe. There is a lesson for Australia in this.

The Australian Government has allowed itself to be manipulated into a debt and deficit trap set by the Coalition. To head off Coalition and media criticism, it foolishly decided that it must get the budget into surplus this financial year. It succumbed to this pressure despite the fact that Australia does not have a serious debt and deficit problem.

There is a risk that if the Coalition becomes the Government in September we will have established a mindset that favours austerity. That same austerity mindset has got Europe into a terrible bind with unemployment across Europe at over 11%. Youth unemployment, for people under 25 years of age, is double that general rate. In some countries youth unemployment is appalling – Spain 56%, Portugal 38%, Italy 38% and Cyprus 32%. These levels of unemployment amongst young people not only bring great personal hardship but also present the possibility of major social and political upheaval. At this stage, most of that social and political resentment has been directed against foreign workers, Muslims and outsiders. We have seen it particularly in the UK in recent days with anti Muslim clashes.

The austerity drive, bringing with it the disillusement of the young is undermining liberal democracy and spawning a whole range of populist, nationalist and neo fascist parties across Europe; the Golden Dawn in Greece, the anarchist Five Star movement in Italy, the anti Arab National Front in France and the europhobic United Kingdom Independence Party.

A great deal of this push for austerity in Europe has been supported and underwritten by conservative economists. Rogoff and Reinhart, American economists sold us a bill of goods that once debt exceeded 90% it would trigger major economic collapse. It turned out that Rogoff and Reinhart made some major errors in their methodology, but conservative economists supported them and indulged their political ideology to try and rebut the Keynesian thesis that the boom is the time for austerity and not recession.

The right wing of the Republican Party in the US joined in the clamour for austerity. Their argument was supported by ideologues who asserted that booms encouraged moral laxity and that it was necessary to ‘purge the rottenness from the system’ as President Herbert Hoover was advised in the lead-up to the Great Depression in the US. That moral judgement is fine for people who have little to lose. But many people suffer badly..

Tony Abbott and the Coalition have been continually telling us about the perils of debt and deficits. With the Australian economy weakening as the OECD has just warned there is a risk that the Coalition will seek to imitate the austerity drive of the Europeans. That austerity drive has not reduced deficits and it has caused untold personal and social harm.

There is a clear lesson to be learned from Europe about obsessions with debt and deficits in times of recession or a weakening economy. Beware on the austerity mindset.