Better late than never on austerity

4 Jun 13
Michael Lloyd

Growing social unrest in the eurozone is one of the factors that has prompted the European Commission to modify its stance on austerity, and extend the deadline for meeting deficit targets

At last the message seems to be getting home to the European Commission. Imposing severe austerity economic policies, at a time when there are substantial unemployed resources, is not only socially damaging, but is contra-indicated from an economic perspective.

The European Commission appears to be modifying its position, albeit somewhat belatedly. However, one should not be too excited. The Commission has not suddenly overturned its fundamental economic approach. It is more the fact of the associated, growing unpopularity of the European project, and the developing social unrest in some countries, which has led to a slowing of austerity measures.

The same five priorities as in 2012 have been re-asserted, and endorsed by the European Council in March 2013: pursuing differentiated, growth-friendly fiscal consolidation; restoring normal lending to the economy; promoting growth and competitiveness for today and tomorrow; tackling unemployment and the social consequences of the crisis; and modernising public administration.

I will not comment on the last four priorities; these are unexceptional and would be endorsed in any country’s economic situation as being an on-going requirement. But the first priority represents a contradiction, and is at the root of the failure of austerity policies in the EU, and in the eurozone in particular.

Clearly, structural reforms are necessary adjuncts to a growth programme, but over-reliance on structural measures, in the absence of adequate measures to stimulate domestic demand, may well leave the EU with a longer road back to prosperity than is necessary. Fiscal ‘consolidation’ is, in general, not ‘growth-friendly’. It will only be so at a time when resources are fully employed and inflationary consequences are evident. Pro-growth monetary policies are useful, but the evidence from the EU over the past few years is that they are insufficient to provide the stimulus required to move the EU economies forward on to a strong growth path.

It is convenient for the Commission to recommend an extension of the time required to bring back a number of the deficit countries to the 3% deficit target, and to allow more time for structural reform measures to be implemented. It permits the Commission to suggest that the underlying thrust of the economic prescriptions they are recommending are correct; it is simply that the ‘patients’  require more time to recover.

Nonetheless, the relaxation of the emphasis on austerity is welcome, and a number of the positive measures proposed by the Commission should have an enhancing impact on growth.

First, they are urging sur countries such as Germany to further stimulate wage growth and domestic demand. This will benefit both deficit countries and the sur countries themselves, and represent a move towards expanded and more balanced growth across the EU and, particularly the eurozone. Given the recent downbeat OECD assessment (- 0.8%) of the growth prospects for the eurozone, this will be welcome.

Second, the Commission stresses the importance of agreeing the 2014-2020 multi-annual financial framework (MFF) which can enable the deployment from 2014 of the 6 billion Euro earmarked for the Youth Employment Initiative, alongside the European Social Fund, to support the Youth Job Guarantee scheme, agreed by the Council in April.

This should be accompanied by greater targeting of the EU structural funds on growth, competitiveness, and employment, hence providing a powerful growth stimulus in several Member States, where, as in the UK, a large part of public investment is co-financed by the EU budget.

And third, the Commission urges the restrictions on the provision of services in a number of countries, including France and the UK, as a means of boosting EU economic growth by up to 2.8%. It argues that the full implementation of the EU Services Directive can play an important role in increasing productivity in domestic markets.

Dr Michael Lloyd is a senior research fellow of the Global Policy Institute, London, and director of LCA Europe. He is a former economic adviser on economic and monetary union to the European Parliament. This post first appeared on the

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