Austerity is not killing the patient, lack of reform is.

Prologue

A junkie is forced into rehab in order to save his life. As the withdrawal symptoms kick in, he starts to scream with pain and curse the moment when he agreed to seek help. As an uninformed witness, you might feel sorry for him and brand the treatment as torture. Surely it is inhumane to let him go through such a pain, isn't it? Well, no. It is not. The pain is a result of his addiction and blaming the cure would be a mistake. Yet this is exactly what is happening in Europe. After decades of debt addiction, the European economies are struggling with the withdrawal symptoms and are blaming austerity for the pain.

However, there is a blame that can be laid at the doctors treating the European patient. The treatment could be more effective if other problems are also tackled yet this means even more pain in the short term. The austerity treatment prescribed to the European economies should be accompanied by an equally painful dose of reform. Structural reconstruction is as necessary as austerity and it is this exact reform that would bring back the solid growth policy makers desire so much. 

How Austerity (kind of) worked 

Since the beginning of the crisis, 5 of the 17 Eurozone countries - so far -  have run into significant financial problems and were forced into asking for EU and IMF help . In exchange for support, these countries have signed up to a painful program of austerity and reform. Cuts and tax hikes have hit hard yet reforms have barely been started. Because of external factors, in most of the EU countries the economic activity is now reaching pre-recession levels. While most financial indicators have stabilised -Ireland has even managed to exit the bailout program - the social pain is only now starting to hit. Unemployment is the clearest sign of this pain: record 12.1% Eurozone unemployment, 10.9% for the EU. 26.7% for Spain, 28% for Greece, 17.5% for Portugal. 24% of EU youth unemployed, 56% youth unemployment in Spain and 60% in Greece.  64%in Greece, 42% in Portugal (new figures released a few hours ago)

It is in this context that a significant majority of voices are warning that austerity has not helped Europe and that it has actually made things worse. Indeed, many of the fundamentals that the austerity policies have been based on have proven to be false. The now famous Reinhard and Rogoff  excel mistake and acknowledgments from the IMF that they have underestimated the fiscal multipliers of budget cuts  have embarrassed the European Commission who is left without the two big arguments it had in pushing austerity.

However, it is important to remember that austerity was not only adopted because of economic reasons. The high-politics game played at EU Councils resulted in countless agreements, all saying the same thing: Northern countries and the Commission would help Southern countries escape bankruptcy if these countries put their budgets in order and reform so they close the competitivity gap. It is interesting to note that before and immediately after the fiscal compact of March 2012, media kept referring to these adjustments as ‘budget balancing’ and ‘fiscal discipline’. Today, the same measures are being labelled as ‘austerity’.

The intention of these programmes was dual: on one hand, countries which lagged behind were supposed to become more competitive and, as such, make Europe as a whole stronger. Secondly, a chance for political compromise and a show of unity to reassure the markets was only possible if the Northern countries could present a deal acceptable to their electorate. It would have been impossible for Angela Merkel to pass a bailout deal without having anything to show for it.

It is this precise political factor that many of those who condemn austerity are now ignoring. At the height of the crisis, the political fractures of the Union were as a big of a risk to the EU economy as the recession itself. Widely divergent government debt yields were a sign of a fractured EU. And this fracture was obvious not just in economic indexes but in the philosophy behind policy as well. As Italian PM Monti very correctly underlined: "For Germany, economics is a branch of moral philosophy”. Transferring bailout money to countries that have broken this moral code without any strings attached would have created a ‘moral hazard’ that would have been unacceptable to the Germans. The only possible agreement included both money transfers (solidarity asked by South) and reform (budget balancing asked by North). Without a political agreement, the markets would have continued to take advantage of the cracks of the Eurozone pushing Italy and Spain to encounter problems in selling their debt. Furthermore, current criticism directed at austerity assumes that Mario Draghi would have made his ‘whatever it takes’ promise to save the euro – widely credited with saving Italy and Spain from the brink - even in the absence of deficit cutting measures, which I believe to be very unlikely.  

Was it fair for the EU to impose such measures on the Southern countries? If you consider the alternatives, either bankruptcy or an exit from the eurozone ( as bad as a bankruptcy, if not worse), the current social problems and unemployment levels are quite modest. Equally telling is the fact that real unemployment figure (not just benefits claim, implied for an average workforce participation of 65%) is close to 12%  in the US - a country that has applied the exact opposite cure to its economic problems. In effect, there is very little to show for the stimulus in the American economy other than significant increases in inequality (with the top earners benefiting the most from it) and debt levels.


But nothing has changed

While the high politics succeeded in reaching an agreement and the EU delivered on its promise to bail out countries in need, local politics failed to implement their promises. Reforms have been painfully slow exacerbating the pain caused by austerity. After six years of recession, it was only in the last week of April 2013 that Greece has voted into law part (not all) of the labour reform agreed in the first bailout. Greece and Cyprus are still having problems identifying property rights for much of the countries’ land because there is no clear record. In the last report on the EU economy, the IMF has yet again assessed that there has been no progress in tackling ‘notorious’ tax evasion in the South of Europe. The tax administrators in Cyprus, Italy and Greece are still politically named. The Spanish banking system has not yet been cleared of bad loans and new loans are very much impossible to get, asphyxiating the creation of new businesses and jobs. Even reforms that have been adopted are now at threat. The new Italian government is being forced to roll back  some of Monti’s reforms, like the property tax, at the request of Berlusconi, the new voice of anti-austerity in the country. Italians seem to have forgotten the country’s performance under Berlusconi when Italy's economy grew least in the world for a decade, bar Haiti and Zimbabwe, and reached the third highest debt-to-GDP level.

It is hard to say how much lower unemployment would be today if aggressive reforms would have actually been implemented. It is very possible that unemployment would have actually been higher as reforms would have also caused some extra pain to the economy but I can't see how the number of long term unemployed would have been as high as it is now. Undoubtedly, the EU would have been in a better position to deal with future problems.

Essentially, very little has changed.  Austerity has forced an internal devaluation and made southern countries slightly more competitive but there has been very little structural change. And the incentive for reforms is receding. While central banks are flooding the market with money and public dissatisfaction is causing social convulsions, governments around Europe are mistakenly looking to change course. There is little talk of stimulus as most commentators realise that is not acceptable for the Germans, but easing austerity is well under way. Unfortunately, the reform programs have also been eased.

Epilogue

After a few days in rehabilitation, the junkie exits treatment and goes back into the world. As there was no appropriate psychological support provided during treatment, the patient doesn’t change his life habits and is soon back on drugs. The treatment fails. At the hospital, one of the  doctors that treated the patient, Ms Dorothea, is facing an inquiry into her treatment which was described as ‘brutal’ and ‘inhumane’ by her colleague, Mr Silvio. Mr Silvio is the one who recommended a priest to help the patient change his lifestyle. The story doesn’t end.

 

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The rise of individuality and the decline of social constrain

Society is structured in such a way that it favours small, incremental and continual change. We have come to recognise that change is good and needed for our social development but we are also scared of its unintended consequences. As a result, both governments and individuals have favoured gradual to radical. Whenever an objective is recognised and agreed upon, we have slowly moved towards reaching it, with ups and downs and detours along the way. Take the eco-movement, 50 years after the publication of ‘Silent Spring’, the book that sparked the environmental movement, we have moved decisively towards a greener economy and lifestyle (with many detours indeed) but we are not even close to reaching the goal of living in a green society.

Sometimes, though, the desire to fix a mistake in our social pattern is so great that gradual change is not enough. The end of racial segregation in the US was the result of pressure being put on the government and the legal system. The legal end of segregation can be traced to the 1954 Supreme Court decision in the Brown v. Board of Education case. But social segregation was slower to disappear and many parts of the US are still plagued by racial discrimination. In this case, the system reacted before society, identifying a fundamental wrong and moving to fix it.

Today, however, we are going through a very rapid change all over the world. Archaic views of society and traditional values are contested from a grassroot level, with people's attitudes greatly changing and with institutions struggling to keep up. Remarkable about this change is not just its speed but also the fact that it is visible, in various forms, all over the world. A rejection of some of the most traditional social values is brewing in most societies.

Who run the world? Girls!

To a certain extent, this rejection can be traced back to the beginning of the Arab Spring when people took to the streets to protest against their governments in places of the world that have little to no experience of democracy. To ask for a transparent and democratic government in such restrictive places like the Arab Peninsula and North Africa is a significant change in social mentality. The fact that women were protesting as vigorously as men was a further of sign of change. 

The Arab Spring underlines one of the major changes we are going through: the increasing involvement of women. For a deeply paternalistic and misogynistic social construct (like the one in these countries) to change to such an extent that women get to protest against the government and generally be very well integrated in the protest movements, was a big surprise. And this was just the beginning. Instances of women refusing to adopt a second rank role in society are increasingly common. Pakistani 14 year old girl, Malala Yousufzai, became a role model for many women in the world after she was shot in the head by the Taliban because ‘she promoted secularism’. 

But the best examples for this new wave of female awakening can be found in SE Asia were women and the younger generations in general are standing up against sexism and sexual violence. The rape and death of a 23 year old woman in India has sparked massive protests in India, Nepal, Pakistan and Bangladesh. New Delhi even witnessed a SlutWalk (for anybody who is familiar with Indian social customs, this event must have been a massive shock). The protests in India have been huge, being labelled as 'unprecedented' by the University of Edinburgh, 'the awakening of the Indian Middle Class' by the Lowy Institute for International Policy and even as ‘India's Arab Spring' by Fareed Zakaria. The government is now scrambling to put in place better legislation to protect women and, judging by the number of taboos that have been broken during these protests, some form of change will have to prevail. The extent of this will, however, be influenced by many factors and it is too early to be predicted.

It is also important to note that, in older democracies, women are increasingly voted in power. Germany, Australia and South Korea, countries that have done very well during the economic crisis, are now led by women.

Pretty and witty and gay

But it is not only via protesting that change can be achieved. In mature democracies where institutions follow the social desires of the population, change comes naturally. And the faster popular attitude changes, the faster the institutional framework will follow. In Europe, where women are already socially equal to men (and increasingly favoured as leaders), sexual minorities are staging a mini revolution of their own. Both Britain and France are debating (and will most likely adopt) laws to allow gay people to marry. The debated has shifted so much in recent years that now the arguments are on whether gay parents should be allowed to adopt or if Churches should be forced to marry same sex couples. In effect, gay marriage has already been accepted and the question now is about the extent of the change to be made in legislation. 

The shock decision by the Anglican Church to allow gay bishops underlines the changes in a society that is eager to offer equal rights to sexual minorities. In the UK, the electorate supports gay marriage by a ratio of 2:1 (62% for vs 31% against). As The Guardian explains, ‘sharper differences emerge when the results are analysed across the age ranges. The over-65s resist the proposal, by 58% to 37%, but support is progressively stronger in younger age groups. The pro-reform majority is 64% among 35-64s, 75% among 25-34s, and an overwhelming 77% among 18-24s.’

The situation is similar in France, although society is much more polarised on the issue. Opinion polls show the general public supports gay marriage but small groups are very vocal in opposing the reform. The debate is complicated even further by a desire of the government to move ahead of the curve and legalise the right of gay parents to adopt children. It is very interesting to see how right-wing, traditionalist forces, have reacted in the French debate. The UMP, crumbling after the era of Sarkozy, is not capable of speaking on a single voice and Marine Le Pen’s Front National discourse is very similar to that of the Muslim religious leaders (the two groups have even promoted the same events).

The beginning of a feminist movement in India and in the Arab countries and the acceptance of sexual minorities in Europe are only a few signs of a greater trend. We are going through a very subtle but powerful change in the social fabric where individuals are taking power from society and rending social norms irrelevant. The family as a basic unit of social construction has been replaced with the individual and the social construction itself is rapidly abandoned. Divorce is now normal and polyamory is increasingly present in the media and in the life of younger individuals. 

Individuals are taking back rights not just from society but from the state as well. The successful referendums on the recreational use of marijuana in Colorado and Washington and the refusal of many other EU and US states to effectively impose the illegality of its use are further signs of individual self-determination.

In many ways, these changes can be explained by a decrease in society’s religiosity. Individuality is best kept under control by referring to religious-born values like self-sacrifice. But as religion is losing its influence, these arguments no longer work.

Narcis takes over the world

There are risks and disadvantages to this change as well and we shouldn’t ignore them. A study shows that young adults are increasingly seeing themselves as being better than anybody else (typical for young adults but with a higher frequency and stronger than usual) with 25% of American students showing signs of narcissism. 

This increase in self-esteem and confidence is also translated at a governmental level with parties becoming increasingly nationalistic and cultivating the myth of the superior nation of individuals. Conservative parties that are focusing on nationalistic sentiments are actually gaining from this change as they can more easily spread the view that their electorate is better than ‘the outsiders’. Japan’s new government is the perfect example.

Changes like the ones that we are seeing now don’t happen very often. In many parts of the world, societies are moving towards John Stuart Mill's  desired world although much change is still needed to reach that objective. It is important to remember, though, that change can have various consequences. The rise of nationalism is one of the consequences that needs to be avoided. If we accept that we, as individuals, are better left free, than we must understand that the responsibility of avoiding damaging changes in mentality also falls on our shoulders.