Friday, 3 May 2013

Why Austerity?

AusterityUK and AusterityEU are two different animals.

They often get lumped together although they are very different.

Peripherals really only have a few choices;
1) "austerity" - where they show some budget constraint and agree to try to close their budget deficit in the short to medium term, with the implicit financial support of Germany and support of their banking system from EU institutions.
2) default/restructuring with or without euro exit
3) euro exit and devaluation (which is a de facto default)

To be clear, a country like Spain or Italy already have a bond market strike. 

The market is not willing to loan money to these countries without there being implicit backstops and ECB support. 

Germany allows ECB and EU support under the condition that there is fiscal constraint. People can argue whether Germany's policy is correct or not, but unless you pay taxes in Germany and are a voter you really have little right to comment.

Many commentators say austerity is failing, and that peripherals should take a different course. That is easy to say, but meaningless.

They refuse to be explicit on the alternative given the constraints. ie. closed bond markets and German finance on conditions of restraint. If politically they are unwilling to leave the euro or restructure, then there really is no other option.

To argue that Germany should agree to fiscal transfers regardless is either naive or dishonest. For fiscal transfers to have any legitimacy there has to be democratic support in both countries. It also means giving up fiscal sovereignty. 

Unless peripherals are willing to have their budgets agreed at an EU level and impose reforms to bring them into line with Germany then  pleading for transfers without conditions is really are just pie in the sky/begging.

Peripheral politicians need to be bold and take responsibility. Blaming Germany and the markets while they have depression level unemployment is feeble. They need to give up fiscal sovereignty or leave the euro.

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