Austerity Day
Britain has joined the austerity club. It already has many members across Europe and more are joining by the day.
The contents of an austerity package are now familiar. They usually contain a wage freeze in the public sector or cuts in pay as in Spain. Some benefits - even for the unemployed in Germany and Ireland - are trimmed. In some countries the retirement age is being increased. In others local authorities are being squeezed. There is a freeze on hiring civil servants. Expensive building projects are mothballed. VAT is raised. Higher earners face stiff tax increases in order to sell these packages politically.
A few short months ago none of this was happening. The cult of austerity (as some people call it) is a recent arrival. It is being embraced out of fear - fear that what happened in Greece could occur elsewhere. If debt is not addressed, the financial markets will force up the cost of borrowing to a point where some countries would struggle to finance their deficits.
British politicians like Deputy Prime Minister Nick Clegg have described failure to tackle the deficit as "generational theft". It would lead to higher interest rates and there would be less money to spend on essential projects in the future. Others point out that deficits choke private spending which is essential for recovery.
In the case of Germany, austerity was embraced by the government to "to set an example". After the years of binge-spending in places like Spain, Berlin is wanting to see countries putting on the hair-shirts and to start living within their means or - as Angela Merkel suggests - living like a virtuous Swabian housewife.
France is the least persuaded by the cult. President Sarkozy has said "if we add austerity to austerity, we are going into recession". Until recently the words la rigueur never crossed a government's minister's lips. Now the French have timidly proposed raising the retirement age to 62. The age of austerity gave the French government cover to implement an unpopular measure.
In Paris they are now working on a spending plan that will be unveiled in the autumn and could include up to 100bn euros (£83bn) in savings.
Across Europe the figure for spending cuts rises above $240bn. It will go higher. Here's the remarkable point: no one knows what the consequences will be. It divides economists. Some say that having so many countries reducing spending at the same time will tip the global economy back into recession. The Americans are fretting. President Obama has said that the world must learn from the "consequential mistakes of the past when stimulus was too quickly withdrawn and resulted in renewed economic hardships and recession".
The eminent economist Paul Krugman has written "what I do know is that economic policy around the world has taken a major wrong turn, and that the odds of a prolonged slump are rising by the day".
As , the economic editor of the Financial Times, said yesterday at a conference organised by the , the circumstances today cannot be compared to the 1980s or other eras, and so no one knows what impact such a sudden contraction will have. Others argue that reining in tax and government spending will not stifle growth; rather it will free up the private sector and stimulate job creation.
It is a reminder, as someone once said, that economics is not a science but the politics of money.
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