Enough with Austerity

In the UK, the country I’ve called home for the past few months, we’ve now officially entered an unexpected double-dip recession. Like Obama, Prime Minister David Cameron inherited a huge debt. However, the British pound is much more vulnerable than the dollar, and the Tories decided to institute swift austerity measures for fear of becoming the next Greece. Instead of stimulating the economy to create some momentum, Britain has begun to feel the sting of untimely austerity. So where is the market confidence that austerity was supposed to inspire?

WUPRadio’s resident European, Johan Olofsson, pens this:

If we chose to ignore austerity because it is uncomfortable and unpopular, it will result in Armageddon. Obama is going to have a tough time pitching austerity as self-defeating, especially since the US hasn’t participated in any form of austerity yet – ignoring the Simpson-Bowles Commission – [and] frankly Romney’s plan isn’t much better.

Armageddon? Really? With austerity on the ropes, conservatives can only rely on hyperbole to shove their policies down our throats. Actually, President Obama should not have a hard time pitching austerity as self-defeating because — well — it is. Fiscal retrenchment now would squash long-term revenue at a time we need it most. What’s the deal with austerity apologists? When did decades of economic theory go out the window in favor of an imaginary concept brewed by biases of the elite? As they say here in England, it beggars belief.

Here’s the pro-austerity version of the European story (characterized well by Paul Krugman): Squandering politicians brought on massive budget deficits that triggered a crisis. The truth is, that only occurred in Greece. It’s an awkward fact for austerians that Spain and Ireland were running surpluses when the crisis began. What went wrong there? Let’s take Spain as an example. Leading up to the crisis, Spain saw a huge housing boom that was financed by large private banks. Sound familiar? This wasn’t about imprudent government spending, but rather the introduction of private capital. In 2007, Spain’s net debt was 27% of their GDP — compare that with 50% in the now externally hawkish Germany. It may seem easy to condemn spendthrift Spain for their troubles, but Paul Krugman (and I) would sooner blame private German banks for engendering a dangerous housing bubble without recourse.

With French President Nicolas Sarkozy struggling against an anti-austerity opponent, the Dutch government crumbling over austerity proposals, and the British double-dip recession, one would think that President Obama is poised for a convincing reelection mantra. He can say:

Recovery from a financial crisis is nuanced and slow. While Europeans have exacerbated their problems through premature austerity, our stimulus helped and we made some necessary cuts too. We’re on the road to recovery.

If only Americans actually paid attention to Europe. Unfortunately, politics is not that simple. The irony is if European austerity sparks a mega-disaster, Obama will pay for it in November. If the Romney austerians have their way, we’ll pay for it too.

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