Across the Eurozone, Citizens Vote Out Austerity Governments

World stocks continue to oscillate with every bond sale and finance minister utterance in the 17 member Eurozone. Yet, the underlying reality is that the situation hasn’t changed at all.

Matthew O’Brien has a nice summary in The Atlantic.

It’s tragicomic. Southern Europe already has an unemployment crisis. Their depression-levels of joblessness are a dagger aimed at the heart of the European project. Absent growth, there’s the danger that southern European politicians will conclude that they can’t get their people to go along with Germany’s agenda of austerity über alles. But this is also political poison for northern Europe. It’s almost impossible to run a balanced budget with unemployment at catastrophic levels — which leaves southern Europe with gaping deficits and no growth. It’s up to countries like Germany, Austria, and the Netherlands to continuously bail out their southern European neighbors. That’s not exactly a popular political platform for Merkel, either.

This makes for some ugly politics. Unfortunately, the euro crisis ultimately demands a political solution. Europe currently lacks the institutions it needs to make the single currency work. There’s no central treasury, or pan-European banking regulator. It’s not worth saving the euro if they don’t eventually create this infrastructure. And that doesn’t seem likely, with Germany’s austerity medicine pushing the two euro blocks further and further apart.

The austerity measures being imposed on peripheral economies are going to cripple them even further with soaring unemployment. It’s an unsustainable solution, and citizens of those countries will act as swiftly as they are able to kick out the offending government.

Under a fixed exchange-rate regime, countries give up monetary independence, but gain more ability to use spending to guide the economy. It seems impossible that citizens would willfully vote in a government that will impose slow economic growth, or in the case of Greece an elongated recession.

Citizens and opposition parties are quickly booting governments that would impose austerity measures. Even in government’s not facing severe austerity political forces are becoming anti-Euro. France is ready to elect a socialist government with spendthrift leanings. In the Netherlands, a row over budget cut backs has led to an election.

The Greek central banker (who is  completely impotent with regard to directly controlling the economy) has warned that

What is at stake is the choice between an orderly, albeit painstaking, effort to reconstruct the economy within the euro area, with the support of our partners, or a disorderly economic and social regression, taking the country several decades back, and eventually driving it out of the euro area and the European Union.

After 5 years of recession and a further 5 per cent reduction in GDP expected this year, how much of a threat can this really be? They have already faced a disorderly economic regression fraught with political upheaval and rioting. In fact, 63.2 per cent of Greeks expect government bankruptcy and they now hold virtually no faith in the electoral system. How much worse could a Euro exit be for Greece? Especially given that, other countries within the Eurozone seem unlikely to support austerity budgets.

Why would solvent countries like Germany agree to support failing economies? German citizens don’t want to pay for the bailout of other countries mistakes. Furthermore, even if they did, it would set a poor precedent. It’s a problem of moral hazard: governments with control over their economies will spend in deficit to spur economic growth, if they are aware that they will receive a bailout.

Even if the ECB and IMF continue to step in to support bond markets, it seems likely that European citizens from the periphery to the core are set to vote out any central authority on fiscal economic policy; and therefore, the long-term sustainability of a single European currency.

5 thoughts on “Across the Eurozone, Citizens Vote Out Austerity Governments

  1. Hi,

    Thank you very much for linking to my website.
    You ask two very good questions:
    – “How much worse could a Euro exit be for Greece? ”
    – “Why would solvent countries like Germany agree to support failing economies?”

    I attempted to answer them here:

    What do you think?

    1. Very interesting articles.

      I can’t say I am convinced that Germany would need to bailout other countries in the absence of the Euro. Presumably, those countries could use monetary policy to smooth out their economies without Germany’s intervention, although this would depreciate the hypothetical Deutschmark and could make German exports less competitive.

      Either way, I think that the fiscal union, although absolutely required, will be a very tough sell. Even in Canada – which has excellent labour mobility and only two languages – there is always an acrimonious debate among provinces tied under the same national flag about ‘equalization payments’. Alberta – Canada’s oil rich province – feels that the government doesn’t return enough of its federal taxes. Many people outside of Quebec feel as though they are funding Quebec’s generous social programs. In reality, Canada’s Atlantic provinces receive the largest benefits per person. Despite the transfer payments, the Atlantic province economies continue to significantly lag the rest of Canada.

      It’s hard enough to get 30 million people who nearly all speak the same language and who are strongly tied politically to agree on fiscal transfers. At least in Canada and the U.S., if the citizens don’t like how the current fiscal transfers, they can always vote in someone new.

      I can’t imagine how difficult it will be to get all of the diverse countries within the Euro zone to come to an agreement on fiscal transfers.

      1. Thank you for taking the time to reply.
        I agree that it will be difficult to get all of these people together and agree to anything. And yet agree they must for as you say, fiscal union is indeed “absolutely required”. The alternative is a messy return to the exchange rate crises of the 1980s and 1990s.
        What do you think?

      2. Exchange rate volatility – especially for smaller countries – is the major disadvantage to having a a floating exchange rate. But, voters always have such short memories.

        Based on today’s elections it looks like the people of France and Greece have voted against austerity, even if it is not their best interests in the long run.

      3. I’m not sure that I agree with you. Austerity is not a solution in and of itself. Countries can effectively borrow ad eternum if they grow faster than the rate of growth of their debt. Clearly a bit (or more) of reigning in of fiscal accounts is necessary, particularly in light of our aging populations, but growth is also a variable in the equation. So there’s a role for finding a path towards growth. While a contraction of public sectors in countries where their presence is pervasive and crowds out private investment (small countries such as Portugal and Greece) is important, it is also important to implement growth measures. Of course, the issue of fiscal multipliers is particularly interesting in Europe, because our level of economic integration creates enormous fiscal policy spillovers, which demands cooperative and concerted action.

        For the public balance net of interest payments and maturities, and considerations of funding costs, wholesale structural reform might be necessary. The example of Japan, and the sustainability of its refunding costs in light of huge stock of debt, makes me think that mandatory private pensions and insurance schemes could assist Europe(an nations) to a great extent.

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