The limits of austerity?

In the past weeks, European Commission President, Barroso has spoken about how austerity has “reached its limit”. At home, Joan Burton, Minister for Social Protection, opportunistically declared that “we have reached the limits of austerity now”.

Here examines what this rhetoric about the limits of austerity means and whether it will result in any change in policy.

The background to this discussion is the deepening crisis in the world, European and Irish economy. The IMF has recently reduced its forecasts for growth in the world economy for 2013 to 3.3% from 3.5%. The Eurozone economy has now had five quarters in a row of economic contraction and GDP is projected to shrink by 0.3% in 2013. The Irish economy also slipped back into recession at the end of 2012. It is evident that austerity is not ‘working’ from the point of view of the economy as a whole.

This has coincided with the debunking of the one the academic props of the austerity-mongers, a paper by Carmen Reinhart and Kenneth Rogoff, which had been widely reported as proving that if a country’s debt to GDP ratio reaches 90%, it experienced a sharp fall in growth rates. This was then used to justify massive austerity policies in order to avoid this level of debt. However, it turns out that there were major data problems with this paper, such as the use of a selective sample, but also an Excel error, which dramatically changes the results!

Of course, it does not fundamentally matter to the capitalist class whether austerity is proven to be “right” or “wrong” academically if it suits its class purpose. However, the controversy over the paper has allowed those capitalist economists who oppose austerity on its own to go on the offensive. This is a real debate reflecting the political problems with implementing austerity without end and the different interests of different sections of the capitalist class.

Although austerity has not worked for the economies as a whole, it has worked extremely well for some sections of capitalism. Finance capital – the bankers, bondholders and speculators – have benefited hugely. For example, they will receive €26 billion in payments of Irish taxpayers’ money this year. Export-oriented businesses have also benefited from the opportunity to push down labour costs. However, those businesses which depend on domestic demand have been hurt. In addition, international capital is threatened by simultaneous austerity across Europe which damages export markets.

These different interests within the capitalist elite partly explain the debate. Those representatives of capital, such as Angela Merkel, who are closest to the banks, are consistently the most pro-austerity, whereas the IMF, which represents the interest of US and world capitalism generally, has had a softer position.

This new rhetoric also illustrates the political problems posed to the capitalist class by five years of vicious austerity. This has laid waste to the basis of support of establishment parties all across Europe. In Ireland, we saw this with the devastation of Fianna Fail and the Greens, and now with the collapse of Labour and the undermining of the trade union leaderships. It is epitomised by the wipe-out of the formerly social-democratic PASOK in Greece which previously consistently received over 40% of votes. The Italian elections and the farce which has followed also illustrates the dangers of political instability facing the establishment.

The consequences for working people of this change in rhetoric are unlikely to be significant. The European Commission and the Troika are continuing to drive austerity policies all across Europe and will continue to do so. Forced to recognise the reality of the deep crisis, they may extend deadlines and give very minor concessions here and there. In Ireland, the recently published ‘Stability Programme Update’ promises at least two more years of harsh austerity.

This document also clearly illustrates how the robbery of working people is being pursued in the interests of the bondholders. The estimates indicate that after implementing €3.1 billion in austerity next year, the government will have a primary surplus of almost €1 billion, i.e. it will take in around €1 billion morein tax revenue than it pays on public services. The projected deficit of €7.5 billion only exists because the state will pay €8.5 billion in payments on the national debt!

Socialists and activists should take advantage of these these discussions around austerity to explain how austerity continues to work for a section of the rich and that it is a policy for the massive transfer of wealth from working people in Europe to them.  In particular, we must highlight the demand for repudiation of the debt as part of a socialist alternative to austerity.