The End Of Austerity

It was exceptionally notable that budget deficits, rising national debt, and “runaway” government spending barely got a mention in Donald Trump’s or Hillary Clinton’s acceptance speeches. These areas have been articles of faith for Republicans for the last 40 years and centrist Democrats like Hillary have often joined in that chorus. But Donald Trump merely mentioned the doubling of the national debt under President Obama and pointedly did not follow that up with any pledge to reduce it. Hillary Clinton never mentioned these issues directly at all, only saying her new programs would be paid for by increasing taxes on the 1%. The elimination of these issues from the campaign is a welcome relief as they were total red-herrings in the first place. Neither our debt or annual deficits are anywhere near the dangerous levels that the rhetoric surrounding these issues claimed. In fact, the fear that was created around deficits and debt only held the country back from recovering from the Great Recession more quickly.

In the United Kingdom, Theresa May has explicitly abandoned the Cameron/Osborne pledge to balance the budget by 2020 in the wake if the Brexit vote, although she apparently is still committed to that goal eventually. “We have not abandoned the intention to move to a surplus; what I have said is that we will not be targeting that at the end of this Parliament,” the prime minister said. And there are already indications that the government will increase borrowing and spending, especially after the budget statement comes out at the end of this year. It appears they will try to finesse the two positions of vaguely supporting a balanced budget while increasing borrowing and spending by using a trick that excludes investment spending from the budget calculation.

At the IMF, a scathing internal report shows the lack of any substantive analysis with regards to the structural problems of a currency union without a political or treasury union and the bailouts and austerity imposed on Greece, Ireland, and Portugal were purely designed to save the currency union and bail out European banks. The fiscal multiplier of austerity was underestimated by a factor of five, and, especially in Greece, the country is no closer to reducing its unreasonable debt burden. The IMF apparently broke its own rules by allowing Greece to borrow from the IMF without any clear path to reducing its debt burden and repaying those loans, either through debt relief or currency devaluation. Due to the structure of the Euro, devaluation could not occur and debt relief was out of the question as it could create a panic run on the big European banks.  The IMF apparently got around this rule by slipping in a clause that voided this requirement if there was risk of systemic contagion. The IMF board was not aware of and never signed off on this clause, in clear violation of IMF rules. Non European member of the IMF board are especially furious as 80% of the lending from 2011 to 2014 went to dealing with the European crisis, leaving the impression that the European board members simply used the fund to bail out their banks and save the currency union.

The last remaining holdout for austerity these days is, of course, the Germans. But with yields on their bonds in negative territory and the possibility of at least some slowdown related to Brexit, pressure is starting to build on the Germans to re-think their position. It can only be good for all of Europe is they do so.