Europe's policymakers have declared austerity dead, and pinned hopes on structural reform. Trouble is, it takes decades to work
Whatever the Eurosceptics may say, presidents of the European commission do serve one important function: scuttling big projects that have become politically toxic. A decade ago, Romano Prodi declared "stupid" the fiscal straightjacket of the early euro era, and that put paid to the growth and stability pact. At first, when small fry such as Ireland and Portugal broke the pact they were rebuked – even fined – by the commission. When France and Germany couldn't live with its strictures, Prodi threw in the towel. Ultimately, evading the pact became so pervasive that it began to undermine the commission's credibility.
Fast-forward to 2013 and this cycle has repeated itself. Since 2010, governments of EU countries have committed themselves to austerity and the pastoral commission has taken the lead in monitoring, coaxing, and occasionally chastising its flock. In the meantime, public support for the EU has tanked. Pew Research reported in May that the proportion of people with a favourable view of the EU had fallen from 68% in 2007 to 46%. Only 29% now believe European integration has strengthened their country. Just 17% believe cutting public debt should be their government's top priority. Emphasising austerity, then, is not only out of step with public opinion but has threatened support for the European project. Ultimately, austerity threatened the political viability of too many sacred cows.
Step forward José Manuel Barroso, austerity's executioner. In late April, he departed from the script in comments to a thinktank in Brussels. Acknowledging the ebb in public support for the EU, he then made the link to the current "financial situation". After that came the killer blow. Barroso noted that the current policies had reached their limits and then opined that successful policies must have a minimum degree of "political and social support", as he put it. The fact that Barroso's spokesman tried to play down his remarks only added fuel to the fire.
Austerity's failure is not just political. Two days before Barroso spoke, Eurostat, the EU statistics body, announced that government deficit reduction in 2012 had stalled in both the eurozone and across the wider EU. Worse, despite all the attention given to austerity, the share of national income spent by governments crept up in 2012, rising more in the eurozone than in the rest of the EU.
The EU's austerity programme either failed to curb government spending or failed to deliver deficit cuts. These facts make a mockery of the OECD's contention, highlighted in its recent economic outlook at the end of May, that austerity programmes in Europe had worked because they would enable debt-to-GDP ratios to stabilise by 2030.
So it's back to pump-priming then? Not so fast. In the wonderland that makes for current economic policymaking, abandoning austerity has, with one notable exception, come with pledges not to reflate economies with public spending. The exception, bizarrely, comes from the European commission. Just recently, Barroso repeated his demand that EU member states give the European Investment Bank billions of euros to invest in infrastructure. National spending on bridges is bad, but Brussels-driven spending is fine. At best this shifts the spending off national balance sheets; at worst it is incoherent.
Since tax and spending policy is off the table and monetary policy has been outsourced to central banks, what agenda is left for finance ministers and Brussels? The emphasis is to be on structural reform. Certainly international organisations such as the IMF and European commission had been advocating structural reform earlier, along with austerity. Now the former is the only game in town.
What can we realistically expect, then, from this new phase of crisis-era policy response?
Not even the proponents of structural reforms argue that it pays off quickly. Reminders of this came in the recent debate over the economic legacy of Margaret Thatcher. It was telling how often serious economic commentary pointed to gains in output per head by 2007, some 28 years after she came to office. Reforms were credited with bolstering competition and increasing numbers at work, but not with raising the UK's productivity relative to peers. Structural reform is no quick fix.
Many promoters of structural reform are honest enough to acknowledge that it generates short-term pain. This isn't difficult to understand. If you've been in a job where it is hard to be fired, labour market reform introduces insecurity, and you might be tempted to save more now there's a greater prospect of unemployment. Economy-wide labour reform might induce consumer spending cuts, adding another drag on a weakened economy. Moreover, this short-term pain isn't likely to be well-received by voters. Indeed, this is why politicians with a healthy interest in their futures have resisted implementing structural reforms.
Still, suppose sweeping structural reforms were implemented with the active support of the European commission. The near-term pain will again undermine support for the European project, and it will fall to another commission president to deliver the coup de grâce. With austerity's demise, the bankruptcy of policies for economic recovery will become increasingly apparent.
Simon J Evenett is a professor of economics at the University of St Gallen, Switzerland. Heather Stewart is away