Austerity policies are the last thing Europe's economy needs, and voters are making sure their leaders get the message.
Can democracy be raising its wonderful, if often lazy, head in Europe? Too often there is skepticism that democracy itself -- the will of the people -- can lead to wise economic decisions and that the American founding fathers were all fearful of the rule of the masses. I have long held the opposite view.
We all know examples of populist uprisings that have failed. The French Revolution was hardly an adulterated success. Populism in the U.S. in the 19th century led to many an ugly idea and many a bad economic solution.
But democracy creates demands for more equal wages, for social goods that reinstate confidence in a nation, and for the spread of opportunity. Democracy often also demands rights for minorities. It was democracy in America that fostered progressive income taxes, Social Security, Medicare, and government financing of education and roads. In my view, equal and strong wages are a source of growth, not a disadvantage that reduces profits as many orthodox economists see it. There is no growth without adequate demand. After 40 years of neglecting this basic idea, it is making a comeback.
Now the people of France may be saying they have had it with austerity. They may well vote out Sarkozy in favor of the Social Democrat Francois Hollande. Hollande beat Sarkozy in the first run-off and, according to the pundits, is likely to win the two-person run-off in two weeks. And Hollande is running an anti-austerity and anti-big finance campaign, if a mild one. Can this break the ice and reverse the trend toward austerity? One former European leader I spoke to thinks it could.
But there is more than just a reaction against austerity in France. The Netherlands is dealing with a backlash against its austerity programs, and the Dutch have been stalwart supporters of German single-mindedness on this issue. The prime minister felt obliged to resign. Even in Germany, the Social Democrats who are increasingly voicing concerns with Angela Merkel’s policies will gain more confidence. There are left-wing soundings in Spain as well.
All this is refreshing and highly welcome. Austerity policies are dead wrong for Europe right now. It is sliding into serious recession, and it may eventually upset the fragile U.S. recovery. The rebelling left is correct about economic policy, even if it is most motivated by economic justice. Could democracy and justice be policies for prosperity? Start believing again.
The French election, however, provided another reason to end austerity. The extreme right of Le Pen received one out of five votes -- a major victory. In times of economic adversity, anger toward ethnic minorities like Muslims only rises. Deep recession is the fertile ground of totalitarisnm and bigotry. All the more reason to reject austerity and shake up Euriope.
How naïve, you say. The financial markets already gave their answer. They are selling everything except German bonds, it seems. That is a first blush reaction, of course. And many, including American business reporters, will say that this shows how silly the French are to think they can buck the austerity approach. Of course the U.S. did buck it, and if not growing with abandon, is recovering. The British adopted austerity, and despite a falling pound that has stimulated exports as well as a very loose moentary policy, its economy is floundering. What are the markets talking about?
If only the financial markets were as wise as the people can be. But that is my ace in the hole. I think even bond traders have begun to understand that austerity is now self-defeating. What they may be most nervous about is a serious political break in the eurozone that forestalls more advances of credit to the struggling nations and any chance to develop Eurobonds to supply social transfers to ease the burden on the periphery. But austerity is not the answer. The more governments cut, the further away move the goal posts for fiscal balance. Many more policy moves are required, but at least this is a start. Who knows? The markets may even rebound some this week.
Roosevelt Institute Senior Fellow Jeff Madrick is the Director of the Roosevelt Institute’s Rediscovering Government initiative and author of Age of Greed.
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