Saturday, June 20, 2015

What Politicians and the Media Aren't Telling You About Austerity

If you're over the age of about 25, you probably remember a time before our politics became pre-occupied with budget deficits and debt-to-GDP ratios. Before "austerity". Aside from a few fringe conservatives, mostly in the U.S., no-one really cared about these things.

You've probably guessed that this sudden shift in the terms of our political debate has something to do with the financial crisis of 2007-08... and you'd be right. The crisis in the banking system that led to the need for huge bailouts paid for from national budgets, was largely contained in the U.S. - but not in Europe.

As shown in the graph, the ratio of outstanding domestic credit to GDP continued to rise in Europe (but not the U.S.) well into the 2010s. The assets of European banks represent multiples of nations' GDPs (the U.K. is one of those nations). By comparison, U.S. banks' assets represent around 120% of GDP - and the U.S. has the advantage of being able to print the world's reserve currency.

So, why do we have austerity? Why has our politics - here in the U.K. and in the Eurozone - become obsessed with budget deficits? It's all about 1) saving the banks and 2) saving the Euro. The lower the debt-to-GDP ratio of a nation - particularly one with no currency flexibility such as those in the Eurozone - the more scope it has for taking bad bank assets onto its books. 

The only trouble is, austerity doesn't work. The economic slowdown that results from austerity policies means that the GDP growth required to get the debt-to-GDP ratio down cannot be achieved. The banks remain at risk of collapse. And austerity itself is socially harmful, hitting the poorest and the disabled hardest.

There has to be another way, because this one is a dismal failure.


Read more about the ideas discussed in this post: Prof. Mark Blyth (Austerity: The History of a Dangerous Idea)


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