Mark Blyth is a faculty fellow at the Institute, professor of international political economy in Brown’s Political Science Department and director of the University’s undergraduate programs in development studies and international relations.
Do you see any “austerity fatigue” right now in Europe? If so, what would be the consequences, political and economically?
There is more than fatigue in Europe. There is serious exhaustion. The policy of simultaneous contractions among multiple countries as a route to debt stabilization has been a disaster. It has generated 25 million unemployed above trend and it has destroyed between 20 and 30 percent of GDP in the Southern countries. The problem is that as GDP shrinks the same amount of debt gets bigger rather than smaller, which is why every country that has undergone an austerity diet now has more debt rather than less. It is self-defeating economically and dangerous politically.
Is it the notion of the “new normal” which retains the politicians and mainstream economist to realize that austerity has failed?
If the “new normal” is a permanent unemployment rate of 20 percent and the constant destruction of productive capacity, then the new normal will not be normal very long. At the end of the day you can’t run a gold standard type if monetary regime, which is what the Euro is in that no one can create the currency that they use and so deprived of inflation and devaluation as options the adjustment to shocks occurs entirely through wages and prices, in a democracy. Eventually someone will vote against it, and at that point the entire project can unravel.
Markets are not demanding austerity. The numbers don’t support the advocates of austerity. Why there is no Plan B in Europe?
You are quite correct that the yields are not correlated to austerity budgets. In fact in 2011 as yields peaked the cuts were at their height. What was lacking was credible central bank policy to prevent massive losses to holders of Euro denominated bonds if the Euro fell apart or the European banking system ran out of liquidity. The LTRO programs plus Draghi’s ‘whatever it takes’ promise has done that for the moment, but it is still just a promise.
Given this, the fact that there is no plan B tells us that the real reason we are doing this lies elsewhere, which is to be found in the overleveraged European banking system, which is stuffed with bad assets and its too big to Bail. Given that no state, even Germany, is big enough to solve the problem of removing these bad assets from the banking system, they squeeze, add liquidity, and pray. Far more effective would be to simply stop doing austerity and allow these economies to grow again since the yields will remain low if Drahgi’s claim is credible. So maybe the fact that we keep squeezing tells us something about the real value of Draghi’s promise?
Thank you very much
Mark Blyth is Professor of International Political Economy at Brown University. He is the author of Great Transformations: Economic Ideas and Institutional Change in the Twenties Century and Austerity: The History of a Dangerous Idea.
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