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Monday, May 14, 2012

The people versus austerity

Special to The Japan Times

HONG KONG — Japan has to be careful that it does not become collateral damage in the fallout from the growing mess in the European Union. The first signs of such damage came with the yen's rise to 79 against the U.S. dollar, as a safe haven currency. Finance minister Jun Azumi had better watch carefully what he says and does.

Elections this month have pushed Europe and the euro, and with them the global economy, to the brink — or abyss — of yet another dangerous crisis. The people have spoken, not merely in France where the triumph of Francois Hollande over Nicolas Sarkozy has grabbed attention, but also in Greece and the United Kingdom.

Their message is loud and clear: We have had enough of destructive job-killing austerity and want to get back to growth as the driving force of economies. Hollande declared in his victory speech that "austerity is not inevitable" and that his victory was a harbinger of change across Europe.

It is hard to be optimistic. There is no obvious leader in Europe — or in the world for that matter — who has a global vision, let alone the personality and the political skills to transcend narrow national and often nationalistic views to work out an economic, financial and fiscal program that would work across borders.

Hollande's victory by 52 to 48 percent over Sarkozy was expected, but France's president-elect is still an unknown quantity. He is more modest than Sarkozy, who pranced across the world stage like a show pony. Former President Jacques Chirac derided Hollande as "less known than (President Francois) Mitterrand's Labrador dog"; Hollande turned the insult into publicity for him.

Even this year, he drove around Paris on a three-wheeled scooter, "more like a pizza delivery man than a president," said one Socialist member of the National Assembly.

He set alarm bells clanging when he declared his real opponent was "the world of finance, which has no name and no face, which will never be elected, but which governs." Later in an interview with The Guardian newspaper, he tried to offer reassurance and said he was no more aggressive than President Barack Obama in his drive to regulate finance. "You could say that Obama and I have the same advisers," he told the newspaper.

Some commentators say that, in practice, Hollande will not be as much a firebrand as his reputation. He is, after all, an enarque, (graduate of the Ecole Nationale d'Administration, the French graduate school that has a quasi-monopoly on the country's elite administrators), so Hollande is very much part of France Incorporated. Germany's adamantine opposition to changes to the European stability pact also limits his room for maneuver.

The best that Berlin is prepared to offer is a velvet glove to soften the iron fist of austerity. Wolfgang Schaeuble, Germany's finance minister, said: "Everybody who gets freshly elected into office must be able to save face, so we will discuss this with Hollande in a very friendly way. But we won't change our principles."

He added that international agreements could not be renegotiated every time a government changes. German Chancellor Angela Merkel, who had shared a campaign platform with Sarkozy during his bid for re-election, herself stuck to her guns saying that: "You can't spend more than you take in. You can't live your whole life this way. Everybody knows this."

France's weak economy will limit Hollande's leeway. Fredrik Erixon, head of the European Center for International Political Economy in Brussels, told Bloomberg News that "Merkel is just going to lean back and watch Hollande jump into icy water and try to swim. He'll soon realize his predicament because financial markets are going to do to France what the French electorate didn't do."

Unfortunately, the French electorate will not allow Hollande an easy fudge of going back on his campaign rhetoric. Parliamentary elections are due in a matter of weeks, so the people who put him in power are watching and waiting. If he reneges on his promises, he will be a lame duck in short order.

The French are not alone in opposition to austerity. The coalition government of British Prime Minister David Cameron took a hammering in local elections, losing hundreds of seats to Labour in a vote of opposition to the cutbacks that have sent the country back into recession.

The coalition government of the Netherlands last month fell because of opposition to budget austerity measures after only 558 days in office. Opponents of austerity have been on the streets in Italy, Portugal and Spain to make their feelings known against policies that have brought cuts to growth and jobs.

The most defiant vote against austerity came from Greece. In parliamentary elections, voters left no party in a position to form a government, smashing those who had gone along with the deficit reduction policies demanded by their international creditors, and supporting far-right and far-left parties.

Alexis Tsipras, leader of the second-biggest party, Syriza, a coalition of radical left and green groups, which took 16.6 percent of the vote, declared the vote "a humiliating defeat" for Merkel's policies.

It may all seem academic because Greece is failing to keep the terms of the bailout, and none of the creditors is prepared to rewrite the deal. Greece is a small country, but still has the capacity to upset the eurozone and Europe and the world because there is no mechanism for a country to leave the euro.

Greece's exit, now a growing inevitability, might itself be no big deal, but it would raise questions about all the European arrangements and send a tsunami through the global economy.

Growing numbers of economists sympathize with the revolt against austerity. In a paper for Vox EU, Charles Wyplosz writes: "Citizens rightly feel that sacrifices do not deliver the promised results. Even the [International Monetary Fund], long criticized for its stern advocacy of procyclical austerity, is now asking that eurozone nations that can 'go slow' ...

"We are left to casual empiricism and lessons from history, both of which show that procyclical fiscal policies are bad, especially when monetary policy is not available any more."

Wyplosz makes a sensible claim that the proper solution must "combine debt restructuring, front-loaded collective fiscal expansion and long-run unbreakable commitments to fiscal discipline."

But where is any politician anywhere who understands what this entails, let alone has the power to promote a workable scheme, the votes to get it accepted and the means of making fiscal discipline stick?

It should be common sense that austerity that reduces growth, cuts jobs and increases the debt burden — as Greece has experienced — is self-defeating.

Meanwhile, Azumi's fingerpointing against Hollande, urging him to stick to fiscal reforms ,seems particularly misplaced when Japan is on the brink of a dangerous experiment to raise taxes without economic reforms that might court damage that could send the economy into a tailspin.

Kevin Rafferty is editor in chief of PlainWords Media.

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