Spanish unemployment is nearing 25 per cent. The suicide rate is climbing in Greece. Britain is in a double-dip recession. Amid all this pain, the cry is growing louder. Austerity policies in Europe are dangerous. Someone has to stop this madness.
Step forward, Franois Hollande, the likely winner of the French presidential election. He is campaigning as the man who will stand up to the austerity ayatollahs in Germany. His campaign is resonating – not just in Europe, but even in the US, where the grandees of the economics profession, from Larry Summers to Paul Krugman, are lining up to call for an end to Europe’s austerity policies. "Insane,” Krugman calls them, with characteristic understatement.
Hollande says that he will replace austerity with growth. Why didn’t anybody think of that before? Unfortunately, a vacuous slogan is underpinned by ineffectual proposals. Hollande’s program stresses small, badly-targeted boosts to public spending, while virtually ignoring the structural reforms that are the only route to sustainable growth.
Spending on infrastructure – "shovel-ready” projects, as President Barack Obama has called them – is, of course, a standard Keynesian solution for an economy that is caught in a downward recessionary spiral. Under normal circumstances, such spending might be a great idea.
In Europe, however, there are plenty of reasons to be sceptical. If building great roads and trains were the route to lasting prosperity, Greece and Spain would be booming. The past 30 years have seen a huge splurge in infrastructure spending, often funded by the EU. The Athens metro is excellent. The AVE fast-trains in Spain are a marvel. But this kind of spending has done very little to change the fundamental problems that now plague both Greece and Spain – in particular, youth unemployment.
Worse, in some ways, EU funding for infrastructure has created problems. In Greece, milking the EU for subsidies became an industry in itself: and political connections were a surer route to wealth than entrepreneurial flair.
As for Italy and Spain, they are not cutting their budgets out of some crazed desire to drive their own economies into the ground. Their austerity drives were a reaction to the fact that markets were demanding unsustainably high interest rates to lend to them. There is no reason to believe that the markets are now suddenly prepared to fund wider deficits in southern Europe. The "end austerity now” crowd respond that it is the responsibility of Europe’s dwindling band of triple-A rated countries to go on a consumption binge and so pull their neighbours out of the mire. But the assumption of unlimited Dutch and German creditworthiness is unconvincing – as the market reaction to the Dutch failure to agree a budget, last week illustrated.
Even in France, the centre of the revolt against austerity, it is hard to argue that the problem is that the state is not doing enough. This is a country where the state already consumes 56 per cent of gross domestic product, which has not balanced a budget since the mid-1970s, and which has some of the highest taxes in the world.
Hollande, who is not an idiot, knows all this. That is why, behind all the feel-good rhetoric about ending austerity, the small print is less exciting. In fact, all the Socialist candidate is promising to do is to take a year longer than President Nicolas Sarkozy to balance France’s budget. In Europe, even the left cannot pretend that deficit spending can continue for ever. So they are reduced to arguing that governments are cutting, "too far and too fast”, in the words of Ed Balls, Britain’s shadow chancellor. This is small-scale quibbling – masquerading as a major doctrinal dispute.
For while the Germans are often portrayed as knuckleheaded advocates of endless austerity, their real message is more sophisticated and convincing. It is that the drive to balance budgets within Europe must be combined with reforms that will encourage private-sector job creation.
The scope for such reforms is enormous. Taxes on labour in France are very high. To his credit, Hollande is promising tax breaks for employers who hire young people. But it would be better simply to cut charges on labour across the board. This is one tax cut that really might pay for itself, by creating jobs.
European businesses are also hobbled by red tape. My favourite recent example was a story in The New York Times of a Greek entrepreneur, whose efforts to start an internet business involved an odyssey of form-filling, culminating in an official demand for a stool sample. High rates of youth unemployment in countries such as Spain and Italy are closely connected to the excessive protections and benefits for workers on full-time contracts – which make employers wary of taking on new hires. As one Spanish businessman recently complained: "In this country, it is easier to divorce your wife than to sack an employee.”
Pushing through labour market reforms is tough and even dangerous. In Italy, in recent years, two economists advising the government on labour-market reforms have been assassinated. But such reforms are the only long-term route to stronger job creation.
By contrast, calls for Europe to spend its way out of debt are an illusion. There is, of course, scope for argument about the pace of deficit reduction. But in a highly-taxed, highly-regulated, highly-indebted continent like Europe, more state-funded public works would simply build another road to nowhere.
Copyright The Financial Times Limited 2012.