10th June 2013: Austerity or Growth?

Governments are treading a fine line between adopting a programme of austerity and not knocking countries back into crippling recession. The experience of countries varies.

Within the Eurozone, Germany posted the strongest growth in 2013q1. This ‘growth’ was an unspectacular 0.1% expansion. Yet, compared to the rest of the Eurozone, it positively shines.

The UK posted slightly better growth of 0.3% in the first quarter. Mervyn King has heralded this as the beginning of a turnaround. Given recent dire labour market figures, this is a rather optimistic statement. But, at the very least, the UK does stand favourably in comparison with the larger Eurozone players. Osborne has stubbornly clung to his austerity programme despite IMF pressure to ease off on fiscal discipline and accelerate growth. Perhaps his reign of austerity has succeeded in allaying investor fears of a severe credibility downgrade. But then, for all of President Hollande’s anti-austerity rhetoric, Brussels has forced him to stick to tougher fiscal rules and raise taxes. But the only thing the French version of austerity that has achieved, apart from a rapid plummeting of Hollande’s popularity, is a triple-dip recession and unemployment that is at an all-time high.

The IMF has now softened its stance on the need for fiscal restraint and the containing of budget deficits. The priority now, they say, is stimulating growth, Keynesian-style. Indeed, this approach seems to have had an impact in the US, where after a massive and unprecedented quantitative easing programme, economic data is looking stronger and healthier than it has for a long time. But do the ailing Eurozone economies have the ability to sustain the high levels of debt that the easing off of austerity would lead to? Indeed that is a structural issue that may rear its ugly head several years down the road as it impairs economies’ long-term ability to grow. In the short term, at least, it seems governments must tread a very fine line between ensuring that does not happen and not knocking key countries back into painful and crippling recession from the brink of recovery again.