European governments adrift

This is my comment from last week’s Fund Strategy.

Last week austerity started to bite among some of the larger European nations.

In Britain the Liberal-Conservative government announced £6 billion of spending cuts for this financial year. The move followed an interview by David Laws, the chief secretary to the Treasury, in the Financial Times in which he talked of a new age of austerity.

In Italy the government announced a €24 billion (£21 billion) austerity package. It included measures to reduce funds paid by central government to Italy’s regions as well as wage freezes and cuts for public sector workers.

Spain’s parliament voted for a €15 billion austerity package on top of plans it has already announced. The recent measures include cuts in public sector wages and a freeze on pensions next year.

Some of the smaller and more troubled European nations – including Greece, Ireland and Portugal – have already implemented austerity. Meanwhile, France and Germany look set to start making spending cuts soon.

But the striking thing is the reluctance of governments to impose austerity. They have preferred to build up huge fiscal deficits rather than risk angering their populations or taking bold measures.

Where severe cuts have been implemented, for example in Estonia, or are underway, including Greece, they have usually been forced on governments by circumstances. Economic conditions have become so difficult that they have had little choice.

In the larger European countries it remains to be seen how far or fast the crisis will take to unfold. The Economic Outlook published last week by the Organisation for Economic Cooperation and Development found that growth was rising faster than expected.

Until European governments start taking a longer term perspective they will continue to drift in the same way they have for the past few years. They will react to events rather than try to shape their destiny.

An alternative approach would be to work out how to revitalise chronically sluggish economies. This would mean promoting strong dynamic growth and encouraging bold innovation. It would mean having a vision of the future which governments are prepared to realise. It would involve restructuring the economy to make it more productive. Some old sectors may need to be reduced while new ones developed.

Instead, Europe is run by governments which have abdicated any leadership in the proper sense of the term. Their only solution to the crisis is to inflict economic pain on most of the population.

* David Laws resigned after this article was written.