Thursday, April 19, 2012

A shift in the dynamics of austerity?

The tsunami of austerity hawkishness seems to be weakening.

There are many factors

1) The expected Hollande win in the French Presidency elections (round 2, May 6)

2) The needs for Merkel to secure SPD support in both houses of the German federal parliament in order for her brainchild, the Fiscal Compact, to be ratified by Germany.

3) The troubles of the conservative governments in Spain and the Netherlands (one of the drivers of the euro austerity rhetoric) to keep their deficit targets,

4) The social reactions not only in Greece but also Italy, Spain, Portugal and Ireland regarding the austerity policies being implemented there.

5) The electoral successes of left-center parties or coalitions in Denmark (in 2011, which now holds the Presidency of the Council of the EU until June 30) and more recently in Slovakia.

6) The caution expressed by organisations such as the IMF

7) The press reports from the "Greek front" that have alerted people to the human effects (sacrifices) of too much austerity and have offered ample evidence that growth via austerity is not a realistic theory or dogma.

All the above, to some extent each, have in my opinion contributed to a recent rise in the number and intensity of intellectuals, economists or others, who are speaking out against the expansionary effect of austerity and other related theories or dogmas! Even some members of the financial world have to expressing concerns.

Thus the dynamics are shifting.  To what exact direction, that is not clear.

a) Less sclerotic targets in budget consolidation efforts ie a rethink of Fiscal Compact's targets
b) Growth oriented spending initiatives to act as a balancing act to the austerity (eg a possible sweetener offered by Merkel to SPD to ratify the Fiscal Compact??)
c) A wider change of direction and "model" in economic policy in the Eurozone/Europlus/EU

We shall see.

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Nick

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