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The cult of austerity

Gavin Hewitt | 09:32 UK time, Tuesday, 23 March 2010

French protest over change in status of national postal service, 1 Mar 10How quickly should public spending be cut? Who would have imagined just a short time ago that this would be the central political argument in Britain. No political party disputes that the scythe must be taken out of the shed. The only question is when and what part of the public sector undergrowth should be hacked back. Sooner or later the debt mountain will have to be reduced.

It is an argument that, in different ways, rages across Europe. On the one hand are the austerity preachers. Clean up public finances, they urge. Slash the deficits. It is the only way to long-term economic health. And do it now.

On the other side are those who denounce this as "shock therapy". To cut now would risk tipping Europe back into recession. They regard their opponents as "deficit fetishists" who have failed to imbibe the lessons of history.

While politicians and economists argue this out another storm is taking shape on the radar. When the cuts come - as surely they will - they will present a profound challenge to what some call the "European way of life". In the firing line will be those large public sectors with their generous support programmes. Some politicians have sniffed out the battle lines ahead. This was the French Socialist leader Martine Aubry, after the first round in the French regional elections: "We do not want a policy that is destroying what France holds dearest - the social welfare model, equality and fraternity."

And so many countries in Europe - faced with competing with the nimble emerging economies - are having to ask what kind of public sector can they afford?

But let's return to the austerity club. Germany belongs. It insists debt is the problem. To those like Greece struggling to cover its deficit the Germans promote the hair-shirt; cut the budget, raise taxes, reform pensions, increase the retirement age, etc.

Now Greece has already promised spending cuts equal to 2% of GDP. Pay in the public sector has been frozen. Some allowances have been cut back. Its economy shrank by 2.5% in the final four months of 2009. Greek unemployment is rising. Some argue that austerity will only shrink the Greek economy further and so make it more difficult to pay off its debts. Others insist that the cleansing of Greece's public sector is the only way to make the country competitive again.

Other countries have embraced the age of austerity. Ireland, in the midst of a severe recession, has cut public sector wages by between 10 and 15%. Even some of the benefits targeted at the most needy have been scaled back. And still the European Commission believes more severe cuts may be needed. The Spanish have announced 50bn euros of cuts over the next four years. Portugal has an austerity programme. Yet there is also a sense that the cuts in public spending have yet to begin in earnest.

In Britain it is not clear where the axe will fall. Carl Emmerson of the Institute for Fiscal Studies says "we face two parliaments of pain".

It is uncertain across Europe how unions and others will respond to austerity. There are almost daily strikes in Greece. The French have a general strike today. There have been protests in Spain. Jean-Paul Fitoussi from the Institut d'Etudes Politiques in Paris predicts "the pressure will impose terrible strains on the government and society for years to come."

Some see a perfect storm brewing: low growth, high unemployment, governments cutting spending and growing unrest.

Yet change is inevitable. The President of the European Council, Herman Van Rompuy, said "the vaunted European Social Model is unsustainable without higher growth and less wasteful public spending."

So a fierce debate is under way across Europe. What parts of the public sector can be sacrificed and what must be protected at all costs? What will the people accept as fair? In the wings governments are preparing to raise retirement ages and pare down pension schemes. Ministers know that caring for a rapidly ageing population may be unsustainable. Taxes are sure to rise. Some predict that the average rate of VAT will reach 20% and that governments will increasingly embrace stealth taxes to fill the gap.

In all of this lies the political battleground of the future. David Cameron last April promised to preside over an "age of austerity" if elected. What the politicians do not know - but is being tested in Dublin and Athens and Madrid and Lisbon - is how much medicine the voters will stomach on the road to economic health.


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