Austerity or stimulus? With the IMF leaning towards the latter, the neo-Keynesian pro-stimulus crowd think they have the upper-hand. As far as Britain’s concerned, the IMF does see some scope for bringing forward infrastructure investment, but that’s hardly an endorsement of Labour’s policy of opposing just about every cut the Coalition makes to current spending.
In the Eurozone, however, the neo-Keynesians are on stronger ground. To put it mildly, the extreme austerity imposed on southern Europe has yet to prove a success.
Writing in the New York Times, the conservative commentator Ross Douthat is horrified by what he sees across the Atlantic:
Writing in the Telegraph, Ambrose Evans-Pritchard is not just horrified, but also angry – describing the bail-out of Greece as a “squalid episode’:
There seems little doubt that assumptions made by the IMF, the European Commission and the European Central Bank – the ‘Troika’ – were grotesquely miscalculated:
On the face of it, the neo-Keynesians have every reason to feel smug. But, actually, they’ve every reason to feel abashed – if, that is, they combine pro-stimulus views on economic policy with pro-single currency views on European policy.
The fact is that, by its very nature, the Eurozone – and the wider European Union – makes a Keynesian response to economic crisis all but impossible.
To stimulate an ailing economy with borrowed money is a risk. Resources are effectively transferred from the future to the present, in the uncertain hope that the debt will be paid-off in the form of stronger economic growth. In a Eurozone context, however, the borrowing is done by one set of countries largely for the benefit of another set of countries – i.e. the transfer of risk takes place not just between generations, but between nations too. Thus, however strong the economic justifications, political considerations are bound to run counter to timely action.
One further inconsistency between the pro-stimulus and pro-EU positions: We are constantly told by British europhiles that the British economy is inextricably linked with that of the Continent. And yet many of the same people confidently maintain that the British government need only abandon austerity to revive the British economy.
With most of Europe in the grip of austerity, do they really imagine that a policy of 'stimulus in one country' stands a chance of succeeding?